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How to Avoid an Epic Fail of a Business Succession Plan

How to Avoid an Epic Fail of a Business Succession Plan

As closely held business owners know, their financial plans, retirement plans and estate plans are inextricably linked to the value of the business.

For the business owner, the success of their business impacts their daily lives. The success of their succession plans (say that five times fast!) is inexorably linked to having a well-conceived and properly prepared plan, that is coordinated with their estate plan. Both plans need to be built to withstand challenges, which are outlined in the article “Five events that can ruin a succession plan” from Kenosha News.

Let’s take a closer look at the “Five D’s of Succession Planning.”

Death. Believe it or not, businesses can succeed in the face of their owner’s death. However, this is only if all of the right steps are taken, and the right people are prepared to lead. If the business owner has named a successor, created a plan and purchased business interruption insurance and/or life insurance, the business has a shot at continuing. However, in most cases, the estate plan fails to address leadership succession, liquidity and leadership.

Disability or Disease. Sometimes disability and disease can be worse than death to a business. If the right advisors and plan is in place for death, the business may survive. However, a sick or disabled business owner, especially if they have been the only ones making key decisions, may be less likely to survive. If a disabled business owner has lost some cognitive function and is not able to make the best decisions on behalf of their business and their employees, the business may lose value.

Divorce. Nothing destroys a business, like extended litigation. This is often what happens when divorce occurs. A smart couple will work together, despite their personal acrimony to protect the value of the business and their joint assets. Tearing each other apart harms children and businesses. The best approach is to have a plan created for what would happen to the business, if the couple divorced. Think of it as a prenup for the business.

Drama. Our tendencies toward drama impact businesses. If there is a succession plan and those plans are communicated to the leaders, who make clear to middle management and employees that there are plans in place to continue the business, the company can remain stable. In their absence, rumors will impact everyone, from key employees to management, to vendors. Nothing hurts a business more when other companies in the same business are gossiping about its impending demise. The shining stars of the company will flee for more stable opportunities. Vendors may refuse credit. It spirals downward.

Drive. Most business owners are self-driven individuals who love to see their inspiration, ideas and energy grow into successful businesses. When it’s time to get into the weeds of details, or manage people, they’re not that interested. Or, they dig into the details and the company depends upon one person to succeed—rarely a good idea. When that drive is lost and there’s no plan to hand things over to the next generation or key employees, the business can slump, lose value and eventually, close its doors.

A strong succession plan does more than protect the owner. It protects the owner’s family, employees and their families and communities. An estate planning attorney who routinely works with business owners will be familiar with the strategies available to ensure that all the pieces are in place to continue the business and protect the family.

Reference: Kenosha News (August 25, 2019) “Five events that can ruin a succession plan”

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