Through our work with business owners, we’ve learned many lessons that can guide us in what to do—and what not to do—to ensure a successful ownership transition for all stakeholders in a company. Below is a list of our top five succession planning mistakes to avoid.
1. WAITING TOO LONG TO START PLANNING
It is common to be so involved working in the business that you have difficulty finding time to work on the business. A successful transition has a foundation in the ability of the owner to mentor the next generation of leadership. Unfortunately, many owners wait until an event such as a heart attack forces them to focus on ownership transfer. No one wants to sell their life’s work without thinking through all the implications. Therefore, engage with your trusted advisors now because your business will experience an ownership transition regardless of whether or not you planned for it.
2. NOT RECEIVING AN OBJECTIVE VALUATION
To be a business owner, you must be optimistic. However, that can lead business owners to have unrealistic expectations about the value of their business. Without having an objective valuation of your business by someone who understands the LBM industry, it can be difficult to answer these important questions:
a. Will the business value plus my other assets be able to fund my post-ownership goals?
b. What transition options are available to me?
c. Is an offer from a potential acquirer realistic?
d. How do I mitigate taxes?
e. Can my cash flow be used to finance the buyout of my company?
3. DISREGARDING THE EMOTIONS
As an owner, you have poured your heart and soul into the business. Further, you are an important member of your community because you provide stable employment and support causes that matter to you and your neighbors. Therefore, it is critical to find trusted family, friends, and/or advisors to speak honestly to about what a business transition means for you personally. Having a plan to provide all stakeholders a chance for transparent communication is the best way to avoid costly interpersonal disagreements.
4. NOT PRODUCING CLEAN FINANCIALS
Many owners also own the property where their business operates, and often charge themselves less than market rent. While a common practice, it needs to be amended as you approach a transition. For example, if you are charging yourself 50% of current market rent, begin charging market rent and restating your historical financials. Any buyer wants to know if your business can support paying market rent.
5. NOT CONSIDERING ALL YOUR OPTIONS
While the number of businesses that are sold to the next generation has decreased, don’t rule out a family member being interested in the business. But just because your kids don’t want the business does not mean that you are out of luck if you can’t find a competitor or private equity-backed buyer. Look at your management team and consider if there are members who have ownership potential. Another option is to consider a partial or full sale to your employees using an Employee Stock Ownership Plan (ESOP) or Worker-Owned Cooperative (Coop). In both instances, you can receive fair market value for your business, and you leave the company in the hands of the people who know it best, your employees.
It can be daunting to think about giving up ownership of your business. An ownership transition, however, is going to happen regardless of whether you are prepared. Therefore, reach out to a trusted succession planning advisor to begin the conversation. Good transitions can take 3-5 years because it takes time to maximize value and transfer responsibilities. Done right, proactive succession planning can help you to run a more efficient and profitable business that will leave a legacy in your community for years to come.
Stratus Wealth Advisors owner and founder Sam Brownell helps independent dealers by quarterbacking a comprehensive succession planning process to provide clients with essential data and advice to make the best decisions for their company and their family. Reach Sam at sbrownell@stratuswealthadvisors.com.
