Business Owners’ Special Series #17
A common misperception is that exit planning and succession planning are different, independent activities: one would choose an exit plan when selling the business to a third party, but one would choose a succession plan when engaging in estate planning and transitioning the business to family members. A business owner does not choose between an exit plan and a succession plan, so let’s clarify a few things.
A succession plan is the necessary training of family members who, or a management team that, will be succeeding you in your business on how to run the business, and how responsibilities and relationships will be transferred from you to them. It is the plan for how the business will go on without your leadership.
An exit plan is not a sales strategy. Exit planning can include a sale of the business to a third party, but that is not its primary purpose. An exit plan can alternatively include transition of the business to family members, but again that is not the primary purpose of an exit plan. The sale or transition of a business are smaller parts of a broader exit plan.
Effective exit planning begins with clarifying the business owner’s goals. This includes understanding the owner’s vision for the business and for life after an exit from the business. The first step includes an assessment of the business’ financial condition, current value and potential value, and setting a course of action to bridge the gap between current value and highest potential value.
The next step includes understanding the personal financial goals of the owner, now, as well as long after an exit from the business. Then, an exit planning advisor will assess the ability of the business exit plan to fulfill the owner’s personal financial plans. When the business is not able to meet the owner’s personal and financial goals, there is a gap. A primary purpose of exit planning is to identify and quantify this gap, and establish a plan to eliminate that gap, so the owner’s business and personal goals can be accomplished.
A common scenario is the business is worth up to 75% of a business owner’s wealth, who may want to exit the business at age 60. Based on their life expectancy, he or she may live for at least another 35 years after they exit their business. Is he or she depending on the sale of the business to ensure they do not outlive their wealth? If yes, it is important for the owner to achieve the highest possible price when exiting the business. Will the business owner achieve the highest price from transitioning the business to their children or to a third party? If the owner decides a third party will be a better fit for their personal financial plan, how will they ensure the business will be sold for the highest potential price?
If a third party sale is required to achieve the owner’s retirement goals, then an effective exit plan will identify the areas of the business where the owner can achieve growth in business value by implementing a value acceleration plan, an integral part of an effective exit strategy.
What Is Succession Planning?
Let’s look at a business owner who has substantial assets outside of the business, and who is not dependent on achieving the highest sale price to achieve their retirement goals. In that scenario, even if transitioning the business to the children may be the owner’s plan, they need to determine whether the children are capable of stepping up to the responsibilities of managing the business. This is part of your succession plan.
An effective exit plan will assess these transitional issues in the succession plan, initiate plans to compensate for skill and knowledge gaps, and identify and resolve conflict among family members in advance, so the business can have an effective transition. An effective exit plan will also assess the business, its systems, processes, infrastructure, human capital, customer capital and all areas of the business operations. The purpose of this assessment is to ensure the next generation is stepping into a business that is functioning at optimal levels, which will result in the best chance of future success.
Let’s not lose sight of the fact that in the exit planning process, it may become apparent to this business owner that transitioning the business to the next generation is not the most effective plan. That is why effective exit plans consider all possible exit strategies, and measures them against owner’s goals before implementing any exit strategy.
The primary purpose of exit planning is to fulfill a business owner’s personal and financial goals, and to execute a plan that will ensure those goals will be achieved. Exit planning will include succession planning, if transitioning a business to children is the optimal choice for fulfilling the owner’s goals. In addition, exit planning will examine alternative exit strategies, assess business strengths, weaknesses and opportunities for value acceleration, and maximize a business’ ability to transition to the next generation successfully, or facilitate a sale to a third party at the highest possible price. This is effective exit planning.
Rich Gunn is the leader of BPM’s Value Acceleration Service Team, which helps with succession, transition and exit planning for business owners. Rich is a Certified Exit Planning Advisor and member of the Exit Planning Institute.
The Business Owners’ Special Series (B.O.S.S.):
The Business Owners’ Special Series (B.O.S.S.) is a library of articles for business owners who are proactively seeking guidance from experts on how to implement value acceleration in their business. Be sure to keep reading, if you desire to develop your business to its maximum potential value and gain an understanding of how and why beginning the process sooner results in building greater value.