12 Pitfalls to Avoid When Transitioning Ownership of Your Business

As a business leader, the legal, financial, and accounting impacts of transitioning your business to new ownership is daunting. In order to be effective, this process— called ownership transition—takes time, initiative, planning, and thorough communication.

It is important to note that leadership transition and ownership transition are not the same. Ownership encompasses the legal, financial, and accounting implications of the change. Leadership, on the other hand, is how you conduct your business and manage your operation. For a successful transition, it is important to develop your leadership plan and your ownership plan in parallel. While this article is focused on ownership transition, be sure to read our recent post on next-generation leadership development for information on how to steward that process well.

When done correctly, ownership transition helps to set the organization up for continued growth. When done incorrectly or haphazardly, the future success of the business can be threatened. Avoid these 12 pitfalls when planning for your organization’s transition.

1. If there are multiple business owners and there is no buy/sell agreement dealing with death or disability, ownership will pass to the estate of the deceased owner. As a result, the estate has lost leverage to negotiate a sale.

To avoid this pitfall: Prioritize the development of a comprehensive buy/sell agreement or the review of the existing one.

2. No plan exists for gradual admission of new owners prior to that date. As a result, new owners may lack the management skills to continue the firm.

To avoid this pitfall: Establish a clear and actionable development program for future owners.

3. Planning occurs too close to the retirement of the owners who manage the company, leaving insufficient time to develop successors.

To avoid this pitfall: Begin the ownership transition process early, at least 3-5 years prior to your desired retirement date.

4. Tax-advantaged retirement plans (such as pension and profit-sharing plans) are not considered as a funding source for an eventual buyout under a buy/sell agreement.

To avoid this pitfall: Consider all options for funding sources when finalizing your buy/sell agreement.

5. Financial obligations to retiring owners are created without adequate funding, potentially causing a financial crisis for the firm when one or more owners retires.

To avoid this pitfall: Review financial obligations with a full-picture understanding of the implications for the organization as a whole under all potential scenarios.

6. Firms fail to consider the option of recapitalization with a limited liability company to make a transition plan more affordable.

To avoid this pitfall: Work with a trusted team of advisors to identify all options for affordability and efficacy.

7. Key employees are not allowed to gain ownership until they late in their careers. As a result, talent may not be bonded to the company and may leave for other firms where the possibility of an ownership position occurs earlier in life.

To avoid this pitfall: Have conversations early with potential next-generation leaders. Develop an actionable development program (see #2).

8. Companies fail to recognize the potential of existing employees to transition into management and business development. As a result, the business may be dissolved or sold for a fraction of its value during its prime.

To avoid this pitfall: Do not forget to look inward at your organization for transition potential.

9. Ownership transition planning is delayed because owners don’t want to allow employees to look at financial records.

To avoid this pitfall: Cultivate a culture of transparency and financial competency in your organization.

10. Future owners are kept out of the planning for ownership transition. As a result, owners are disappointed when employees choose not to pursue ownership interests.

To avoid this pitfall: Include next-generation leadership in the planning and decision-making processes.

11. Ownership transition is not considered a part of a strategic planning process.

To avoid this pitfall: Prioritize ownership transition as you do all other areas of the organization’s strategic planning. Keep it top-of-mind with all key employees and decision-makers.

12. Businesses fail to understand that customers like to see younger generations being prepared for management because it assures the customer of uninterrupted service.

To avoid this pitfall: Do not forget about customers in this process. Establish a clear change management and communication plan that cultivates trust and confidence in your customers.

An effective ownership transition is a complex, multi-year process that requires the time and effort of not just leadership and ownership teams, but those that support them and those who will eventually step into their roles. While it may be hard to see the return on these investments at the outset, they will pay out in dividends in the end in the form of a successful business, capable leaders, and a confident retiree.

Are you beginning to consider what ownership transition will look like for your own business? Schedule a free advisory call with a member of our team to discuss how you can be sure you are setting you and your organization up for success.