The biggest pitfall in succession planning is not having a plan at all

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To the average person, the term “business succession planning” has little meaning – and probably less interest.

To the people who run a business, however, it is a matter of critical importance.

Or should be.

A Google search of the term yields a long string of results stressing the importance to business owners of having a succession plan.

“Top-performing companies know that one key to continued organizational effectiveness is Succession Planning,” advises a recent post from Chapman & Co., a St, Louis-based leadership institute that helps organizations develop leaders. The post goes on to quote a study that found 90% of the Top 20 companies have a formal succession planning process in which leadership potential is assessed separately from performance.

A posting on the website of Insperity, a national company that offers services tailored to business development, warns: “By failing to create an orderly plan for succession, your company may not get a second chance if it doesn’t adapt immediately after a key player leaves the company.

After all, you can’t anticipate when a serious illness, accident, disaster or pandemic will strike – or even just a normal life event that takes someone in a new direction – but you can prepare for what will need to be addressed should a big change in leadership come.

“While it may seem like a time-consuming process, there are six main ways succession planning benefits your business.”

Local experts on the subject could not agree more with those assessments.

“A solid succession plan, like other issues that face any business, is beneficial because it provides predictability,” said Peter Randolph, of Miller, Miller & Canby, a Rockville law firm whose specialties include business law and taxes.

Randolph, who spoke on the subject of succession plans at a recent Maryland State Bar Association conference in Ocean City, said having such a plan allows business owners to decide, among other things, who can own the business, who will have control to make decisions and how to limit the tax impact of a sale or other transfer of ownership.

Despite the value of a succession plan, most companies do not have one, Randolph said.

“Death is the ultimate succession plan,” he said in an email response to questions. “Whether you plan for it or not, that day comes, and if you did not plan it will be a crapshoot whether the business and your family are able to continue to thrive.

“Sometimes it works out,” he added. “but more times, often it does not.”

Daniel R. Mendelsohn, a corporate law attorney with Venable LLP, in Baltimore, who also spoke on the subject at the recent state bar association forum, agreed that succession plans are not as common as they should be.

“Most businesses see such a plan as a cost,” he said in an email response to questions. “Spending on succession planning doesn’t increase revenue.” He added: “I try to get my clients to think of it more as insurance. Good succession planning can allow for seamless transitions when the time comes.”

A good succession plan should include four elements, Mendelsohn said: control, ownership, liability and taxes.

Control, he explained, means deciding who is going to run the business, while ownership involves mapping out who is going to participate in the economic success of the business.

Liability, he went on, involves making sure nobody ends up putting his or her personal assets at risk due to actions taken for the business, and tax planning means ensuring that you only pay what you have to.

What the specific plan includes is different for each business, Mendelsohn said, but those are the focus points for any succession plan.

Asked for a final tip on the subject, Randolph pointed out that business succession “is not one-size-fits-all scenario. I would advise any business owner to work with a practitioner that understands your goals for the future. You may not fully understand your own goals, but entering into that conversation, you are likely to gain clarity.”

Mendelsohn noted that the documents business owners used to form their business are important but are rarely reviewed or updated, especially for small, family businesses.

“For effective succession planning,” Mendelsohn said, “those documents must be reviewed and updated to reflect what the parties actually want.”