The 5 Common Mistakes Owners Make When Transitioning a Business

Transitioning a business means preparing for a change in its ownership, leadership, or control, whether the owner plans to retire, sell the company, transfer it to family, or step away because of health or other circumstances. Mistakes usually happen when owners wait too long, leave important decisions unwritten, or fail to coordinate the business transition with their financial and estate plans.

Mistake 1: Waiting Until Retirement Is Around the Corner

One of the most costly mistakes is treating succession planning as something to address shortly before retirement. A transition can take years to prepare properly. A future successor may need time to learn the business, relationships with customers and employees may need to be transferred gradually, and the owner may need to determine how the business will provide retirement income after control changes hands.

Mistake 2: Assuming Everyone Knows Who Will Take Over

An owner may believe that a child, employee, or business partner will naturally step into the leadership role. Such an assumption is not a good business transition plan.

The intended successor may not want the responsibility. Two children may have different expectations about ownership. A planned business transition can establish who will control the company, who will own it, when authority changes, and what happens if the preferred successor cannot or does not want to serve.

Mistake 3: Failing to Establish the Business’s Value and How a Transfer Will Be Funded

Owners often know what their businesses mean to them without knowing what the businesses are worth for purposes of a sale or ownership transfer. Without a reasonable method for establishing value, the owner and successor may enter a transition with very different financial expectations.

Funding is equally important. A buy-sell agreement, for example, may establish when one owner’s interest can or must be purchased and how the price will be determined. However, the agreement still needs a realistic way to fund the purchase when the triggering event occurs.  Otherwise the business may need to be sold to an outside buyer.

Mistake 4: Treating the Business Plan and Estate Plan as Separate Matters

For many owners, a business is one of their largest assets. A succession plan that says one thing while the owner’s trust, will, beneficiary arrangements, or other estate documents say something different can create unnecessary uncertainty. Coordinating business succession with estate planning helps make ownership instructions, management authority, and the owner’s broader legacy plan work toward the intended goals.

Mistake 5: Planning the Transfer but Not the Transition

Signing documents is important, but a successful business transition is also an operational event. Owners should therefore consider what the business will look like on the day after they leave.

A plan that transfers shares or membership interests but leaves no clear leadership structure may still place the company’s stability at risk. The goal is continuity, not simply changing the name of the person who owns the business.

Start Planning Your Business Transition

The five common mistakes in transitioning a business share a common problem: important decisions are postponed until there is less time and fewer choices.

Attorney Dennis Fordham, a State Bar-Certified Specialist in estate planning, probate, and trust law, can help business owners with the estate planning needed to agree with what they want to happen to their businesses.

Call the Law Office of Dennis A. Fordham at 707-263-3235. His office is located at 870 South Main St., Lakeport, California.