Business succession planning: five mistakes to avoid
This article first appeared in French in the September 2022 issue of the Journal des Parcs industriels of the Corporation des parcs industriels du Québec (the Quebec Industrial Parks Corporation).
After years of hard work, it’s time to retire. Several complex questions come to mind. How do you transition? How do you choose the right person to take over? What will happen to your business?
As you plan your departure, you want to be sure that your successors are just as committed to the sustainability and success of the company you have spent years building. Succession planning is forward looking, but it is also a difficult process that requires time, thought and preparation.
Here are the five most common mistakes business owners make in planning their departure, and ways to avoid them.
1. Inadequate planning
Careful planning is the key to a successful business transfer. Since this is a long process that can take two to five years, it is never too early to start. A strategic plan will increase your chances of success, reduce uncertainty and keep your business sustainable. Our experienced professionals can offer you customized support, informing you of the options, the mechanisms to be prioritized, and the tax consequences.
2. Not considering all the options
In general, there are three ways entrepreneurs can leave their businesses. It is important to consider all of them so that you can ensure a succession that is in line with your company’s human and strategic objectives. When properly prepared, each of these options usually allows for a smooth and harmonious transition.
a. Family succession
Selling your business to a family member, while more complex, can be a very advantageous option. It is a good idea if your priority is for the business to continue in accordance with the values and vision you have established.
b. Succession by management team or an employee
Another interesting option is to have an internal staff member succeed the owner, since he or she will be familiar with the company, its clientele and the industry. If you want to keep your business alive, you will have to look for high-potential employees and prepare them to acquire the necessary skills and any required funding.
c. Succession by a third party
Transfer to an outside buyer is a long process, because it can be hard to find a successor with similar goals and values. This option can be interesting, however, since it usually brings in a higher selling price while giving you more flexibility as to the type of transition you want to make – either leaving completely or remaining on contract for a given period of time.
Choosing your successor is one of the most important business decisions you will have to make. Not considering the full spectrum of succession options will prevent you from making an informed choice and deprive you of solutions that can be tailored to your goals.
3. Not bringing in a team of experts
There are human, financial and strategic issues in all succession planning. You must have a team of competent and experienced experts in those fields from the very beginning. By relying on professional advice from the outset, you will reduce the risks inherent in the succession process, achieve your goals more quickly, and provide the next generation with the guidance required for the transition.
At very least you will need the services of lawyers and accountants who specialize in mergers and acquisitions.
With valuable business acquisition experience, lawyers are an indispensable asset in the acquisition process. They know how to draft, simplify, and interpret all documents related to the acquisition of a business, which are often complex.
An accountant can also help you by defining the financial issues specific to the transaction and putting together a customized financial package. Accountants can be really valuable as objective assessors of the seller’s data, irregularities and other useful information.
4. Overvaluing the business or failing to realistically value the business
It is essential to make a realistic and objective assessment of the business that reflects its real value, taking changes in the market, competition and the business environment into account. Hiding or manipulating this crucial information can impede the transaction process or even destroy it, and will inevitably jeopardize the company’s sustainability.
5. Failure to prepare for “post”-succession
You will need to work with the buyer to establish the type of transition, the integration of the new board and an operational model to achieve and/or pursue strategic objectives effectively and quickly. All this planning must be shared promptly, clearly indicating any changes. Uncertainty is your worst enemy because it can lead to employee departures and loss of customers.
Our M&A team will be able to advise you in your succession process.
The authors thank law student Delphine Grou for her assistance in writing this article.