Every business needs a succession plan: How to groom a successor and avoid common mistakes (2023)

Succession planning for business owners isn’t just for the ultrarich and powerful like the Roy family battling it out on HBO’s “Succession.” Having a plan in place for who’ll take over when the founder exits is essential forallentrepreneurs.

Yet, 30% of business owners don’t have a formal business succession plan, according to the Northern Trust Institute’sBusiness Owner Benchmark Survey. Worse, of those owners who do have succession plans, 50% have major concerns about their successor’s ability to maintain the success of the business.

Also read: ‘You think you know someone until you work 100-hour weeks together.’ How to keep the peace in the family business.

Ask an expert

With this in mind, Next Avenue spoke with Eric Becker, 60, co-founder and co-chairman (with Avy Stein) ofCresset Capital Management, a Chicago-based firm specializing in advising entrepreneurs, CEO founders and their families.

Following are highlights of the conversation, with Becker’s advice on how and why you should create a succession plan for your business:

Next Avenue: Why doso many business owners lack succession plans? And why are the ones who do so worried about them?

Eric Becker:There are multiple reasons, and I would say, in my experience, that 30% number might even be understated. In some ways, it’s a little bit like other areas of life that require planning. People don’t always want to go there.

For example, having a will and doing personal estate planning — a lot of times, people kick that can down the road. That’s because we don’t want to confront these realities.

Another reason: Small businesses are, many times, resource constrained. But there are resources available to help people get this kind of work done. And it’s very, very important.

I wonder if some of it is also about ego — that the business owner may say, ‘Nobody can run this business the way I do, so what’s the point of trying to have a succession plan? They’re just going to screw it up.’

It’s true. I have a friend who calls that ‘The Magic Man Syndrome,’ which means that ‘I’m The Magic Man or Magic Woman and this business wouldn’t exist without me.’

That’s a mistake.

When you’re building a business, build a business worth buying. Think about it through the buyer’s eyes and see what they see. How would a buyer look at your business? If you think of yourself as that Magic Person, the buyer’s going to say: ‘What happens if something happens to Joe or Jill? What am I going to do?’

When you look at your business through the buyer’s eyes, you can come up with the right things that need to be done, identify the vulnerabilities or gaps and then fill them, so you end up with a business worth buying. And that is the most powerful succession plan of all.

What are the chief benefits of succession planning?

(Video) Family Business Succession Plans: 5 Things You Need to Know

The first is peace of mind.

The second is financial advantages. By doing the right succession planning, I think you will build a more resilient, agile and valuable business.

A third would be the financial benefits around tax savings, which can be very significant.

The last thing I would say: Like many things in the world and in our life, it’s just the right thing to do.

Why should your employees be in a less-stable business because you haven’t done the right planning? Why should your family have the terrible anxiety if, God forbid, something happened?

When should an entrepreneur start thinking about succession planning and why?

As early as possible. You almost couldn’t start too early. You want to start this planning early to help you build a better business and help you sleep better at night.

Doing this planning can help the business survive a founder’s illness or an accident or a change in interest. If you wake up one day and don’t love the business the way you once did, why should customers or employees or the community suffer because you didn’t do the proper planning?

It sounds like part of succession planning is about creating a legacy so your business will live on when you’re not running it, maybe even when you’re not there anymore. Right?

Absolutely. I think having alegacyis a beautiful thing.

See: Many small-business owners remain resilient and optimistic: Here’s what 2023 may hold for entrepreneurs

Planned vs. unplanned succession

You say that succession planning is also about estate planning and taxes. Can you connect the dots?

Sure. So, there is planned succession and unplanned succession.

Unplanned succession would be you wake up one day and want to do something completely different or you have an accident, or something happens and you’re out for a prolonged period of time or permanently.

And then you have planned succession which is saying: By this date, I intend to sell this business or retire, or sell it to the employees, or whatever.

(Video) Why Family Businesses Fail To Do Succession Planning

When you exit the business, if you’ve done proper succession planning, you not only can reduce the tax burden on the sale itself, but for a family business, you can make significant differences in the cost of transferring those intereststo the next generation.

So it’s about planning where your wealth will go and the philanthropic goals you may want to accomplish.

Who needs to plan

When you talk about estate planning and tax planning, are you only talking about family businesses handed down to a child or aboutallbusinesses?

All businesses that involve a sale with shareholders, because those are issues that come up over and over and over again whether you are the CEO of a large company and have stock options and have accumulated ownership over time or whether you’ve built a small private business.

You believe owners also need to think about their identification with their businesses. What do you mean?

How the sale will affect you in terms of who you are. Because many people identify themselves with the business. ‘Iamthe business.’

Also, I know people who sold their business and then their kids came to them later, upset, and said: ‘Why did you never discuss that with me? I was interested in that business; I would’ve loved to have joined you.’ And they never thought to even ask.

For an owner who hasn’t done any succession planning, what’s the first thing they should do?

The very first thing to do is this emotional and personal planning. To think through what are your personal goals with this business, how does it tie into any family considerations and how does it tie into your own self in terms of what you want to do with your life?

Then, after you’ve had that talk with yourself, the next step is to start looking at who can help you with this planning process. A financial planner would be a great person to talk to. An estate tax attorney would be an excellent person to talk to. And then, potentially a business consultant who may help you identify gaps or vulnerabilities on the journey to building a business worth buying.

Mistakes to avoid

What are some succession-planning mistakes you’ve seen?

The mistakes can go all the way back to the formation of the business itself.Not working with professionals to set up the ownership structures in the most ideal way, from an asset-protection and estate-tax efficiency perspective right at the beginning. Not seeking the advice of a tax accountant around small business tax incentives you can qualify for when your business is small and early.

The second mistake is not building a team of people where the leadership of the business is covered in the event that something happens to the founder.

I can give you an example of a nonprofit business organization whose owner became ill and had not put the right team together before that. The business became unstable in his illness. His friends who were part of this organization took over his business for a couple of months and sort of held it together until he could get back on his feet.

That’s a terrible feeling, to be in the hospital and think that the business might fall apart without you.

(Video) Webinar: An Objective Succession Planning Process

As you get later in the evolution of a business, the succession mistake is someone comes along and wants to buy your business and puts an offer in and you don’t have the right expertise and advice around how to handle that.

We’ve seen people sadly sell their businesses sometimes for not the full value because they did not have the right expert help and didn’t run a [succession] process. That’s a mistake that can, in some cases, cost people literally millions of dollars.

Related: 6 essential estate planning documents every adult needs

Handing down family businesses

Can you talk a little bit about succession planning and family businesses? What should owners be thinking about regarding passing on their businesses to their children?

You need to understand your kids if you’re thinking about that. Being the child of a successful entrepreneurial parent myself, I can tell you that many times these are big shoes to fill. You may not even understand the pressures that thenext generationmay feel.

So, talking to your kids about it and understanding their interests and being open, I think is very important. What you may end up finding is that you have children who are not interested [in running the business]. Then you have children who are interested but aren’t capable. Then you have kids who are interested and capable.

I think probably the one that’s most challenging would be the child who has no interest in the business, especially if the parent had been thinking that this was their successor.

Of course, you don’t want to pressure the next generation to get into something that they don’t want to do; that’s burdening someone with a big weight on their shoulders. It’s a big mistake.

The other big mistake is to take a child who doesn’t have the training, experience or capability to do this. Putting them in a position like that is also a very stressful.

How to groom a successor

For the child who is interested and does have the capability, it’s about cultivating that, with mentorship, education and training.

And having them work in different parts of the business. I think giving them those opportunities so the next generation can try their hand and understand the business is good for them. And it’s also good for the founder or the parent, the entrepreneur.

How should an owner help a child who’s interested but not quite ready to take over?

My favorite way of doing it is — when they’re really young, have them do summer jobs or after-school jobs at the business. Give them an opportunity to know the people who work there and understand some of the basics.

There’s also nothing better than gaining experience in another organization. Whether they work at another company in the same industry or any well-run business, gaining experience elsewhere builds confidence. Then, other people at your business won’t think: ‘Well, of course this person is here because they’re the child of the founder’ and discount their capabilities. If you’ve come from another organization, you’ve had a chance to prove yourself there.

When theydojoin the business, having an intentional plan where they work in different elements — sales, operations, finance — and then a stepped-up plan to take on more responsibility.

(Video) Succession Planning in Family Business

Avoid divided leadership

Do you ever recommend that the owner spend some time — a year, five years, six months, whatever — with the person who’s going to take over, running it together before the owner walks away? Or is it better to just have it where one day you’re the owner and the next day somebody else takes over?

There are two schools of thought about that. Somebody who is mentored and trained and grows into the role is fantastic and that makes a lot of sense.

Where you do have a challenge is if there’s any perception of co-leadership. Then, it’s confusing in the organization who you [the employee] go to. It’s a flawed concept rarely done well. Not impossible, but rarely done well.

That’s where this ‘clean break’ concept can come into play. If you have done your work well — either in picking someone great who came from the outside and getting them ready or growing someone from within the organization — you can really separate when you turn it over to them, so people won’t undermine their chances of success by continuing to come to the founder.

Also see: ‘We are surprised and bewildered’: My brother passed away and left his house, cash and possessions to charity. Can his siblings contest his will?

Taking his own advice

What went into your succession planning at Cresset?

Cresset is young; it’s five years old. But we did, even in the earliest days, all the things that you and I have talked about in terms of tax accounting and legal planning.

Our vision for the business was to build a hundred-year platform, something that we felt had every chance of being here a hundred years from now. So, in the succession plan, that included bringing on unbelievable talent onto our leadership team.

We’ve built a team where if anything happened to Avy or me, we feel our clients and our team members are in great hands with a resilient leadership team and a deep bench.

Do you have a written succession plan that says, ifthishappens…or in 2032, Avy and I are going to leave and here’s who’s going to take over? Or is it open-ended?

It’s written around unplanned succession because the platform is young and because we are loving it and energetic and we don’t have an immediate plan relative to our own retirement. We’re just completing our first five years.

A written succession plan is something that we will do in the next five years, certainly well before I’m 65.

Richard Eisenbergis the former senior web editor of the Money & Security and Work & Purpose channels of Next Avenue and former managing editor for the site. He is the author of “How to Avoid a Mid-Life Financial Crisis” and has been a personal finance editor at Money, Yahoo, Good Housekeeping, and CBS Moneywatch.

This article is reprinted by permission fromNextAvenue.org, ©2023 Twin Cities Public Television, Inc. All rights reserved. It is part of Lessons from Leaders, a Next Avenue initiative made possible by theRichard M. Schulze Family FoundationandEIX, the Entrepreneur Innovation Exchange.

More from Next Avenue:

(Video) Succession Planning Webcast | How To Do Succession Planning in 7 Steps


What is the most common mistake in succession planning? ›

The biggest mistake in succession planning is the failure to plan at all. “It's critical for companies to do succession planning, but oftentimes they don't,” says Jackie Anderson, HR manager at RMI, a transportation and warehousing company in Mattawan, Michigan.

How do you groom succession? ›

6 Ways to Groom Your Successor
  1. 1) Document.
  2. 2) Demonstrate.
  3. 3) Educate.
  4. 4) Cross Train.
  5. 5) Mentor.
  6. 6) Expose.
Jan 1, 2008

What are the most important things you should do right now to prepare a succession plan for the human resources director role? ›

Assessment phase
  • Step 1: Identify significant business challenges in the next 1–5 years.
  • Step 2: Identify critical positions that will be needed to support business continuity.
  • Step 3: Identify competencies, skills, and institutional knowledge that are critical success factors.
  • Step 4: Consider high potential employees.

How do you plan a business succession? ›

Developing a Business Succession Plan
  1. Address anticipated timing.
  2. Identify one or more successor.
  3. Address the value of the business.
  4. Provide for implementation of the plan.
  5. Discuss communication with employees, customers and family.
  6. Include tax planning.
  7. Provide for contingencies.
Nov 11, 2020

How can family business avoid succession mistakes? ›

It is extremely crucial to create a solid business succession plan early and make necessary adjustments later on. A solid plan ensures that every key business member, along with your family members, knows their roles, responsibilities and what is expected from them.

What are the three rule of succession? ›

Legitimate Succession, 2. Compulsory Succession, and 3. Testamentary Succession. We will also attempt to identify places where succession law is ambiguous.

How do you groom a successor in a family business? ›

Tips on Grooming Your Business Successor
  1. Make sure there's a strong team behind. All leaders are only as good as the teams behind them. ...
  2. Create a program that expands the range of the successor's expertise. ...
  3. Take special care in choosing a successor to a family business.
Aug 2, 2021

How succession planning helps to groom? ›

Succession planning is important for grooming and developing competency of the next possible successor. The right training helps the potential successor to improve his strengths and overcome weaknesses. It also prepares him for various duties, challenges that he might face in future if he fills up the position.

What does grooming a successor mean? ›

to prepare someone for a job or position. He was grooming his son as his successor.

What can go wrong with succession planning? ›

Succession planning problems: 6 pitfalls to avoid
  • Going with your gut and ignoring the data. ...
  • Focusing on past performance without considering potential. ...
  • Reserving succession planning for only the C-suite. ...
  • Taking the one-and-done approach. ...
  • Stopping development where the titles start. ...
  • Viewing all failure as negative.

What causes succession planning to fail? ›

A lack of insights into the skills of employees, existing biases, and the absence of transparency often leads to poor succession planning and talent pool scarcity.

What is succession planning weakness? ›

One of the disadvantages of succession planning is data management. Companies must prepare to assess all data to ensure they identify the best individuals for the job, adequately prepare successors and assuage any concerns others may have about the transition of power.


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(Hillel Presser)
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