BY DOUG BONDERUD
How to create
a great legacy: avoiding the pitfalls
Y OU’VE DECIDED TO SELL your business and name a successor. You’ve read part one of our “How to Create a Great Legacy” series in Issue 13 of In Your Corner, so you’re equipped with the knowledge you need to value and sell your business. In part two, we’re looking at some of the most common missteps business owners make when they start on the path to creating their legacy. More importantly? We’re going to help you avoid them. Fail to plan? Plan to fail Owners know that their business lives and dies by this adage. Data shows that 20% of small and midsize businesses fail within their first year. And by the fifth year, 50% have shut their doors. While it’s impossible to predict every outcome—as the ongoing impact of the pandemic makes clear— business owners who take the time to consider as many potential paths as possible are better equipped to handle challenges as they occur. When it comes to succession and legacy planning, meanwhile, it’s easy to put the cart before the horse. You’ve already done so much of the hard work, from getting the business off the ground to carving out your target market, turning a profit, and creating a sales and service model that’s sustainable. It’s easy to get caught up in the idea of creating your legacy without considering the potential problems you may encounter. As with your business, however, success in your legacy depends on: • Taking the time to consider potential areas of difficulty
• Identifying ways to handle these obstacles • Taking actions that increase the likelihood of positive outcomes
the company’s future, this isn’t something you can do after the fact. If you leave without a statement in place, the new owner(s) are under no obligation to provide details about their plans or listen to your suggestions. As a result, it’s worth taking some time to think about what role you want to play after you leave, and then codify this role to make sure you’re prepared to make the jump.
owners, especially if they’re family or close friends. For example, while C Corps don’t have limits on the total number of shareholders, S Corps can only have 100. In addition, C Corps can offer multiple types of stock, whereas S Corps can only offer one. When it comes to taxes, meanwhile, S Corp owners are only taxed once on the income they receive from the company, while C Corp owners are double taxed, first on the business side and then again on their personal taxes. To help avoid business structure issues, it’s a good idea to sit down at the beginning of your succession planning to determine what type of structure best fits your business once you’re gone.
Here’s a look at the top seven missteps—and what you can do about them.
Missing a clear vision Succession plans focus on what happens
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after you leave a business, but have you considered if you’ll still have any personal involvement with your business? Depending on your preference, you may want to leave the company completely behind, still receive regular updates, or have a hand in decision- making under certain circumstances. With everything going on, you may forget to draft a vision statement. This is a way to clearly describe your vision for the business after you leave, and define the limits of changes that can be made immediately after your departure. While there’s no requirement to draft a vision statement that gives you a say in changes that could significantly alter
Lacking the right business structure Depending on your plans for succession,
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your current business structure can enable or inhibit the efforts of the new owners. For example, does your business currently use a C Corp or S Corp tax classification? In the case of a C Corp, the business itself pays taxes on its income, while owners pay tax on whatever salary they take. Under an S Corp model, the corporation itself doesn’t pay tax. Instead, owners report company revenue as personal income. If your succession plan lacks the right business structure, it could cause problems for the new
Forgetting about family concerns On paper, the idea of business succession
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often seems simple, especially if you have children or other relatives who are interested in taking over the organization when you leave. In reality, however, the choice of a successor (or successors) can cause significant familial conflict.
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IN YOUR CORNER ISSUE 14 | 2023
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