Business Killers Self-Assessment #4: “There’s Plenty of Time for That”

Business Killers Self-Assessment #4: “There’s Plenty of Time for That”


Continuing our review of the six common mistakes that can destroy businesses, we now turn to the fourth mistake: procrastination about retirement and succession planning.

Answer the following questions to see if your company is vulnerable:
• Does the owner know when he or she wants to retire?
• Does the owner know how much income is needed in retirement?
• Does the owner want to be running the company full-time five years from now?
• Does the owner know how much control he or she must maintain over the business to ensure retirement income?
• Has the owner explored financing opportunities for key employees to buy the company in the future?

The more “no” answers, the greater the risk. How does your company look?

Retirement means different things to different people, but one thing is certain – you’ll need enough money to live on. That means figuring out a budget and knowing how you’ll pay for it.

If you don’t want to work forever, then you need a plan to fund your requirement. And if that means selling the business, do you have a ready, willing, and (financially) able existing employee or family member to take over? If so, you will want to make sure that there is a business left for him or her to run when you step down. If there isn’t, you’ll be looking at a strategic or financial buyer outside the company. Either way there will likely be a transition period where the current owner relinquishes the reins and phases out of the business.

As we noted last month, the absence of a clear succession plan creates ambiguity at best, and a vicious power struggle or inability to continue operating the company at worst. Take the time now to plan your retirement objectives and ensure the success of the business in the hands of the next generation.

Business Killers Self-Assessment #3: “That’ll Never Happen to Me”

Business Killers Self-Assessment #3: “That’ll Never Happen to Me”


The blog continues today with our ongoing discussion of the six common mistakes that can destroy businesses. The third mistake is failing to have a succession plan that spells out who takes over the company if the owner becomes temporarily or permanently unable to run the business.

Answer the following questions to see if your company is vulnerable:
• Is there a formal succession plan on file?
• Does the succession plan address disability?
• Has the owner involved key employees and family members in succession planning?
• Has the owner identified in writing who he or she wants to take over the company?
• Do the owner’s family members and employees know who is going to run the company?
• Does the owner have disability buy-sell or overhead expense insurance?
• Does the owner have contribution protection for his or her retirement account if disabled?

The more “no” answers, the greater the risk. How does your company look?

The impact of losing an owner or high performing employee on a temporary – or permanent – basis cannot be overstated. Two steps that will help avoid these problems are disability insurance to provide needed funds to avoid drawing down cash reserves and a written succession plan that provides an interim or new management.

Disability insurance can help replace after-tax income and may also provide benefits to pay ongoing overhead costs of the business. Some policies also have a lump-sum payout option similar to a death benefit on a life insurance policy which might be used to buy out an owner’s interest if the disability is permanent and he or she can’t return to the company. Emergency or short term contingency planning – which usually requires cross-training or cash reserves to hire replacement employees – is also essential to make sure that the company can survive a temporary loss.

Business Killer #4: There’s Plenty of Time for That

Business Killer #4: There’s Plenty of Time for That


So far, we’ve killed off two business owners and left another one with a disability. In the remaining Business Killers installments, the owners are alive and healthy – but they’re still capable of making potentially fatal mistakes.

An art gallery is owned and operated by an older man whose daughter works for him. The scene opens with the daughter mentioning that her friend Jeff just found out that the family business he had planned to take over had been sold. Although the intention was to keep it in the family, Jeff’s father had put all his money into the business and needed to sell to fund his retirement.

The daughter is concerned because her own father has reinvested most of the art gallery profits into the business. She’s worried that she could end up like Jeff and urges her father to develop a viable succession plan for the gallery. But he isn’t interested in taking the time to do so, and tells her not to worry. Besides, he says, hasn’t he always taken care of her? Famous last words…


Most owners assume they will have time for business planning later. After all, they are running a business which can demand all of their attention. But as noted in the previous scenarios, not planning for business succession – especially in family-owned companies – is one of the major reasons why businesses fail when the founder leaves.

Not having a clear succession plan creates ambiguity at best and a vicious power struggle or inability to continue operating the company at worst. Founders need to have a reliable successor who is already groomed to take over. This means someone who has the technical and managerial skills to run the business. It also means transitioning key vendor and customer relationships ahead of time to ensure continuity of operations without the founder.

As we’ll explore in more detail in the next post, a family business owner also needs to ensure that he or she is financially able to retire while preserving jobs for other family members who want to continue working in the business.

Keep it in the Family Part 2 – Tips for Succession Planning

Keep it in the Family Part 2 – Tips for Succession Planning


1. Think out loud
Creating a succession plan as a fait accompli is rarely a good idea. There are simply too many misunderstandings, assumptions, and interpersonal dynamics that can thwart the best laid plans if you don’t communicate your ideas early and often.

2. Equality is a myth
While “share and share alike” is a good idea in theory, not every child is equipped with the same drive and talent to run your business. It may be fairer for the successor(s) you have chosen to have a larger share of ownership than family members who will be passive owners. Or it may be best to transfer management and ownership to your chosen successor and make other financial arrangements to benefit your other children.

3. Invest in training time
Your family business succession plan will have a much better chance of success if you work with your successor(s) for a year or two before you hand over the reins. For solo entrepreneurs, sharing decision making and teaching business skills to someone else can be difficult, but the effort can pay big dividends.

4. Get outside help
It can take a village to sell a business. Most owners will benefit from engaging their CPA, estate planning attorney, business attorney, and financial advisor in the planning stage. There are also companies such as PragmaVentures, Inc. and Codiligent, LLC, which specialize in business succession planning and who can help owners work through difficult issues.

5. Start early
If you want to keep your business in the family, procrastination is a bad idea. Many business succession experts suggest a minimum of three to five years advance planning. A good succession plan can ensure that you will have the funds needed to retire and that the company you have built will thrive in the hands of the next generation.

Keep it in the Family?

Keep it in the Family?


So you’ve decided to sell your business and you want your children to earn a living after you retire. Why not combine both objectives and sell the business to your kids? For many business owners, a sale to family members is a chance to maintain a legacy through the next generation. And there are benefits to keeping the business in the family.

• As an exit strategy, transferring the business to a family member allows you to handpick and groom a successor and may also create an opportunity for estate tax avoidance planning.
• A private sale to a family member also may be a solution to a lack of marketability for your business.
• If the family member is already involved with the business, there is less ramp-up time to familiarize the new leader with the inner workings of the company.
• Finally, a sale to a family member may let you stay involved without the same level of daily responsibility.

On the downside, developing a family succession plan can be enormously difficult. According to the Family Business Institute, 88% of current family business owners believe the same family or families will control their business in five years, but statistics undermine this belief. Only about 30% of businesses survive into the second generation, 12% are still viable into the third generation, and only about 3% of all family businesses operate into the fourth generation or beyond.

Setting aside the very real impact of taxes, a major issue that business owners often overlook is whether there is a viable successor. You may want your first-born child to take the reins, but he or she may not have the interest or skills to handle that responsibility. Perhaps another family member is better suited. Resentment may develop among the remaining children who were not selected. Or it may be that no one is able to pick up where you want to leave off. Examine the strengths of all possible successors as objectively as possible and think about what’s best for the business.

Stay tuned for tips on succession planning strategies to make sure your business stays in the right hands when you retire.