Five reasons succession plans fail

You have the dusty binder on a shelf somewhere. But if you think you're finished, think again. Here are some ideas for avoiding the common pitfalls that businesses face during family transitions.

By all indicators, your business is successful. All your children are launched; your oldest daughter has joined the company and is showing real talent. You’ve just expanded your beach house so that there will be plenty of room when your grandchildren visit. You and your spouse are planning a summer trip to Asia.
Even though you’re in perfect health, a colleague’s recent heart attack propels you to call your corporate counsel and set up a visit with his tax and estate partner.
On the way to the law office, still feeling anxious, you and your spouse agree on objectives: provide for your spouse during lifetime, treat all the kids fairly, protect the business and the beach house. You decide to use up most of your gift tax exemption this year to gift 40% of your shares outright to your children. You keep the remaining 60% but provide in your will that if you die before your spouse, your shares will pass to a trust for your spouse. Finally, everything decided and the lawyer draws up all the documents. You and your spouse sign and initial (over and over). Shortly thereafter, you pay the (not insignificant) bill and put the binder of documents in your fireproof file (just in case).
Finally, you can breathe. You’re all set: you’ve done your estate planning. And you’ve earmarked your oldest daughter as your successor. Your business succession is certain to be successful. You can relax.
But you shouldn’t.
You’ve tackled a big part of the project, but there’s more to business succession planning than estate planning and naming a successor. As with so many things in life, execution is the key. Here are five pitfalls that have sunk many a succession plan.

Disinterest
Is it realistic to expect that the company will stay in the family after you’re gone? You may not be able to imagine selling the business, but you should make sure the family wants to stay in business together, and that they have the ability — talent, interest, enthusiasm, knowledge, experience, and financial wherewithal — to carry it forward. Bring in an experienced facilitator and spend time talking with your family members about their vision for the future. Realistically assess your collective ability to continue the business.

Infighting
If the family is committed to staying in this business together, and has the ability to do so, can they make decisions together? This is less a question of personality and more of structure: do you have a governance system that can enable business, ownership and family decisions to be made effectively? (And remember that sharing the beach house will require the same sort of collective decision making.) Invest in developing the structures and policies of organized decision making, and start making decisions together now.

Inexperience
You’ve identified a successor — the daughter, in our scenario — but is that person ready to take the reins? How can you and your board help her gain the experience she will need to take over? Assess your daughter’s preparedness. Executive education, mentoring, membership groups such as YPO can provide your daughter with useful experience and a broader perspective on the issues she’ll undoubtedly face.

Insularity
Is your board up to speed? Entrepreneurs often distrust boards, fearing interference. But a good board can make the difference between success and failure if succession happens unexpectedly. Consider adding two or more independent directors. Present your company’s core strategic issues to the board for discussion.
Are you ready to own a company with your children? For entrepreneurs used to making decisions quickly, adjusting to wider ownership can take some time. Avoid the tendency to ignore the new owners. Begin developing more formal decision-making processes, including regular meetings with clear agendas. Avoid doing all the talking — your goal is to bring along the next generation of decision makers, and to do that, they need to practice making decisions.

Money
If you’re out of the picture, you won’t be drawing a salary to provide for your spouse’s living expenses — your spouse will need distributions from the business. Remember, distributions, unlike compensation, will flow ratably to all the owners. Will this situation set up conflict between your spouse and kids as the owners of the company? Between your daughter as manager and the rest of the family as owners? As a founding owner-manager, you may not have thought much about distribution and compensation policies — now is the time to begin. Look at compensation, capital reinvestment plans, free cash flow, distributions — do you have the balance right to achieve your strategic goals given the new ownership structure and a potential change in management?
Now that you’re truly awake, consider this: succession planning is really long-term strategic planning for your business and your family. Congratulate yourself and your spouse for tackling the estate planning, and now get on with the rest.

Amelia Renkert-Thomas is joint managing director of Withers Consulting Group.