Nine Succession Planning Mistakes Small Businesses Should Avoid

1. Attempt Succession Planning Without Other Strategic Plans. Succession plans define a company's business heirs, but what will they inherit? They will inherit a company with no vision, no strategy to deal with the competition, and no plans for changing the way it does business, if the current owners spend too little time planning for the future. Every firm should have strategic plans to increase its market value.

2. Fail to Create a Market the Company. Too many small and medium-sized business owners operate under the myth that when it comes time to retire, they will simply sell the business, monetize their equity in the company, and retire with a bundle of cash. But that is more of a myth than a reality. Each year thousands of business are listed for sale, and there are no buyers. The current owners need to market their companies and "create demand" for owning the firm. Otherwise, they may not have any choice in selecting successors or a new management team.

3. Procrastinate. There are a variety of reasons firms procrastinate about developing succession plans: too many pressing matters at hand, thinking about passing the company on to a new generation is depressing, there is plenty of time, and the current owners will be around for a long time. Ironically, firms prepare for unexpected expenses by maintaining cash reserves, but most small and medium-sized businesses fail to appreciate that accidents can happen to owners as well.

4. No goals. If firms do not have an end goal in mind, then they are unlikely to achieve it through succession planning. The end goal should address such issues as when is it time to sell or transfer power, what will the current owners do after the transfer, what percentage of the purchase price can be financed, what type of buyer would be good and what type would be bad for the future of the firm, how should the transfer be executed to minimize the tax burden. It is scary to think about succession planning when these key issues have not been addressed.

5. No Independent Valuation of the Firm. It will be hard to attract good buyers or successors unless agreement on a realistic value of the business can be reached. Sometimes the current owners are unpleasantly surprised that the business they have developed and the capital they have acquired is valued much less in the market than they personally value it. The value of the firm may also depend on external events beyond the control of the current owners, and thus contingency valuations may be required.

6. Sell to an Insider Who has Little Funding. For sentimental reasons, many business owners prefer to transfer ownership to a trusted employee who has been with the firm for years. But generally these employees have little funding to acquire a business. In that case, the current owner will want to prepare a deferred compensation plan that will not leave him exiting the firm with no cash.

7. Ignore Training. Many small business fall into the trap of thinking they have to accept their successors as they find them with their existing endowment of skills and experience, take it or leave it. But if key skills and responsibilities are missing from the background of a likely internal successor, then succession planning will enable the firm to train and develop that successor into a better and more qualified person. Training does not require a person to attend formal classes and be tested on comprehension with exams. On-the-job training may be just as valuable, e.g., where a person is given responsibility for the firm's finances or marketing efforts prior to succession. Leadership training courses are rarely worthwhile. The one-size-fits-all, generic leadership training courses are the worst of all. If people have natural leadership skills, these tend to emerge in the course of their daily interactions with people.

8. Keep Succession Plans a Secret. When the staff is left in a vacuum as to who will succeed in running the firm, it creates the impression that the firm has no succession plans. Those eventually who become new owners will be treated with suspicion. Keeping the succession plans secret hinders existing managers and employees from identifying themselves as possible successors. Without a firm commitment or expectation about the future, key personnel may leave the firm.

9. Develop a Succession Plan Once. Some businesses make the mistake of believing a succession plan is the equivalent of writing a will. Once it is written, there is allegedly no need to revise it. But succession planning is a dynamic process that involves training, hiring, internal development, and external marketing. Succession plans will grow stale if they are not periodically updated and revised to address changes in the market place that the firm is currently facing and will face in the future.

Dr. Michael A. S. Guth, Ph.D., J.D., is a risk management consultant and practicing attorney at law based in Oak Ridge, Tennessee. In addition, Dr. Guth is a financial quant and former investment banker, having worked for Credit Suisse First Boston and Deutsche Bank in London and Frankfurt. He specializes in developing investment strategies and strategic plans for small and medium-sized companies, as well as mergers and acquisitions for large corporate clients. For five years, he consulted to the electric power and gas industry in the USA, and even managed the Middle Office (financial risk control) groups for two trading floors.

Dr. Guth has taught over 30 courses on-line at the undergraduate and graduate level on topics ranging from Managerial Economics to Strategic Management to Business Law. He can be reached through web page riskmgmt.biz/succession2.htm