As an increasing number of Americans reach (or pass) retirement age. There is one issue which getting little attention – success planning. Sure, most of us are familiar with the concepts of passing wealth from one generation to another. But the issue gets more complicated when talking about a business, or a property, which will be passed from one generation to the next. With that in mind, here are some of the biggest succession planning problems and some tips on how to solve them.
Not Being Strategic
For many advisers, succession planning is nothing more than a tick the box exercise. However, the reality is some else completely. If you are planning on passing a business to your heirs, then there are questions of who will be the best leader of the company and how to handle decisions once you are gone.
It’s not just businesses either – maybe you have a property which will need to be shared amongst your heirs while making sure your better half still has use of the property while they are alive.
As such, you need to be strategic about your planning. This starts by focusing on creating value when transferring ownership. In some cases, this will mean making hard and unpopular choices but the idea is to get beyond thinking of succession as a transaction and more as a new strategic direction for you and your family.
Failing to Consider the Options
The trap that many family businesses fall into is believing that the only solution to their succession challenge is an ‘internal transition’ – which is often code for someone in the family. While this might be the founders ideal transition, one should plan other options. These could include management earn-outs, selling the business, or even closing the business.
One advantage of thinking through the options is that it will force you to become more realistic about the end state while helping to craft an action plan which will have a better chance for success.
Waiting Until the Last Minute
All too often family businesses wait until the last minute to address succession. Unfortunately, this will force you in making bad decisions. As such, you want to draft a minimum of a
For example, if you have a residence which is part of your succession plan, then you want to have a clear plan on who will take ownership of the property and what will happen during that process. If you are looking to sell your family business, then you might need to make some strategic investments before an exit becomes viable.
As such, you might want to consider a reverse mortgage to tap into some excess capital to execute the strategic plan. While you can search for lender, keeping in mind that doing so means that you need to have a clear plan to repay the note when the time comes. This way you get the cash while making sure your family retains ownership of the property.
Not Considering the Effect on Your Personal Finances
Another common issue is failing to consider personal finances during succession planning. In some ways, this is to be understood as advisers constantly tell their clients on the need to separate their business finances from their personal finances.
However, it is also a massive mistake. The reason is simple – succession planning is not a one and done exercise. Instead, it is a series of phased exits all of which will have significant tax and wealth implications for owners. As such, you want to sit with your advisers and walk through the impacts not only from a business perspective but also from a personal perspective.
After all, succession planning is all about passing as much of your wealth as possible to the next generation, so only looking at one-half of the equation is shortsighted at best.
Relying on the EV – Emotional Valuation
Let’s face it, most owners have a golden number in their head and this is what they believe their company is worth. While this number is good to have, in most cases it has no connection to reality.
As such, you need to wary of ‘Emotional Valuation’ as an unrealistic number could sink your chances to sell or transfer your business. So, when it comes down to valuing your business rely on an expert to determine how much your company is worth as this will give you a more credible target for your negotiations.