Common Mistakes in Illinois Business Succession Planning and How to Avoid Them

One of the most important decisions you must make as a business owner is planning for the day you or other important employees are no longer willing or able to lead your organization. Having a well-developed and detailed succession plan is key to ensuring that your company not only survives but flourishes amidst major organizational changes. 

Yet many businesses struggle to come up with a cohesive succession plan, or fail to execute it properly, putting the company’s viability at risk. Neglecting to plan for the future can harm a company’s viability. An experienced Naperville, IL business law attorney can advise you on the best practices for making and implementing your organization’s succession plan. 

Why Is Succession Planning Important?

Succession planning is not simply a matter of choosing the next generation of company leadership. It is a process of developing a strategy for what happens to a business when an owner or important leader leaves in order to ensure the organization’s continued stability and success. It takes into account legal, tax, and business valuation concerns. 

Succession planning is particularly important for family-owned and small businesses, but corporations also need to implement it to ensure minimal disruptions when important leaders depart. Without a comprehensive succession plan in place, unqualified leadership could take over and undo years, if not decades, of hard work. 

What Important Legal Documents Govern Succession Planning?

Many decisions about succession planning are set out in corporate legal documents. The appropriate legal document will depend on how your business is structured, whether as a limited liability company (LLC), corporation, partnership, or sole proprietorship. 

For instance, a sole proprietorship might utilize estate planning documents, such as wills or trusts, to transfer ownership shares. An LLC might incorporate succession planning into its operating agreement, while a partnership would utilize its buy-sell agreement to determine how a partner may or may not depart the partnership. In a corporation, on the other hand, the shareholder agreement will govern the terms of control transfer. The bylaws and articles of incorporation may also address aspects of succession planning. 

These documents will specify successors who will take over in certain situations, valuation methods for company shares, and even the timetables for retirement in family-owned businesses. Other legal documents that can be used to structure succession planning include powers of attorney and various trusts. 

What are the Elements of a Successful Succession Plan?

A succession plan begins by identifying the current state of the company and its leadership and formulating a strategy to address what happens when the owners or top leaders depart. It should address financial aspects such as the projected company growth, valuation, and tax issues. Larger organizations should identify potential leaders to assume key roles as they become available. Additionally, the organization should put in place training and development opportunities for potential leaders, as well as actively recruit top talent.  

What Are Common Mistakes Illinois Businesses Make When Succession Planning?

Putting Off Succession Planning

Waiting until there is a leadership vacuum or the business owner wants to retire to make a succession plan can expose the company to risk. Unexpected events can cripple a company that has not put in place a plan for what happens on the day after a leadership change. To avoid this, organizations should have a framework in place from day one for how leadership and ownership transition will occur. It should identify either specific successors or have a strategy for selecting them. 

Improperly Valuing the Business 

Business valuation is an important aspect of knowing whether and when to sell a business, whether to keep shares even in retirement, or whether to transfer them. By hiring a qualified business appraiser, you can evaluate the organization’s accurate value. This will give you a starting point to base your succession strategy, and also be an important tool in any negotiation to sell the company. 

Not Establishing a Leadership Transition Process

Succession planning should address leadership vacuums across the organization, not just with ownership and top leaders. It should envision specific employees within the organizations that could be good targets for certain leadership positions, or actively recruit individuals with the skills to ultimately be leaders in the organization. Companies should also train promising management to be ready to take over future leadership positions. 

Keeping Succession Plans Secret

Particularly in family-owned organizations, keeping a succession plan a secret can lead to conflict. But even in larger companies, communication and transparency will go a long way towards retaining top talent by growing employee trust in the company and motivating employees who perceive that they work for a company with a long-term strategy for success. 

Ignoring Tax Consequences

Ownership transfers tend to have tax implications. A comprehensive succession plan should be structured to minimize taxes for the business owner and the departing leadership. 

Failing to Update the Succession Plan

If your company has put a comprehensive succession plan in place, it will include leadership development within the organization or even name specific successors. As things change and develop, individuals may leave the organization or no longer be interested in taking over leadership positions. Still others who appeared good prospects may have faltered in their role. It is important to put in processes to reassess the succession plan periodically. 

Failing to Involve Important Leadership

Succession planning should ideally involve all the key stakeholders, including the board, potential successors, human resources, and even significant employees. This will ensure not only transparency but also avoid blind spots by having a company-wide perspective on succession. 

Call a Naperville, IL Business Law Attorney

Succession planning is vital to ensuring your business continues to run smoothly when you or other important leadership is no longer at the helm, yet it is a complex process that should take into account multiple variables. The experienced Naperville, IL business law attorney at the Gierach Law Firm can advise you on the strategies that best fit your organization and guide you through any legal concerns to navigate this process. Call the law firm at 630-756-1160 to schedule a consultation.