Exit Planning is more than Business Succession Planning
What is the difference between Exit Planning and Business Succession Planning?
Huge!!
The former is charting a course to an end and the latter is a means to an end.
Business Succession Planning
I am sure most business owners have heard of “business succession planning.” Their attorney, CPA, or financial advisor may have mentioned that they need to have a “business succession plan.”
In most instances, the advisor suggests a strategy whereby the business owner considers a 3 to 5 year timeframe to properly train and transition the business to some successor. The identified successor is usually some insider – management (key employee) or child(ren) working in the business.
The advisor works with the business owner toward this “succession plan.” They have identified the heir apparent and slowly transition more responsibility to the successor. We want the successor committed to the plan, so we may even offer the successor some small ownership interest now with a carrot of full or majority ownership in the future.
If all works as planned, the business owner exchanges his ownership interest for some payment or more likely stream of payments. Sound familiar? What is wrong with this plan?
In large part, there is nothing wrong with this plan and in fact, this type of transition may be part of the larger scale exit planning engagement. The problem with this type of plan is whether other options are considered.
Did the business owner succumb to the path of least resistance (i.e., transfer to an insider) or did they truly consider their options and discover that the insider is truly the best choice?
What happens if an involuntary event (for example, death or disability) occurs before the succession plan is complete?
Without exit planning, the answer is clear - the business owner did not consider all options because they limited their options to an insider buyout and they did not protect the value of the business from unknowns.
Exit Planning
Exit Planning is simply good business! Exit planning is a process of merging the business value with the owner’s business, personal and financial goals. The result of exit planning is making the business as valuable as possible until the business owner decides on exiting while focused on the business owner’s personal and financial goals.
Unlike business succession planning, exit planning does not begin with a buyer in mind or limit the transition of the business to an insider. Exit planning does not set a time for when the business will be transitioned but begins and ends with the business owner’s business and personal goals and objectives.
A successful transition or succession can only occur if the business owner has something to look forward to after they transfer the business. If the next life stage is unknown, the business owner will become frustrated with this newfound freedom.
Why do you think so many business owners re-enter the workforce after they departed or simply slow down without exiting? It is because they do not have something that can fulfill their interest that work once did. An important part of exit planning is helping the owner determine what their next life stage will be – that personal mission.
A successful transition or succession can only occur if the business owner feels financially secure after they sell their business. How does the owner know if the sale of the business will produce enough financial resources to satisfy their financial needs?
The business owner needs to perform a financial assessment to determine their financial needs. After they know what their financial needs are, the business owner, after considering non-business assets, will determine how much the business value needs to be at the time of sale.
If you have only considered insiders as your buyer and it is known that selling to an insider does not produce the highest business value, how secure is the business owner in the financial success after they transition the business? Exit planning helps the business owner determine the financial gap and improve the business value through improving business strategies.
I have a client that started their business succession plan without knowing what they will do in 3 to 5 years when they are fully divested of their business interest. They are stressing to find that personal mission before they exit.
I have another client that knows they want to be in Florida fishing and golfing. They have plans to sell the business to a third party and are looking forward to exiting the business. The difference between these clients is the later considered their personal end game and the former focused on exiting the business.
If you are a business owner considering exiting your business, stop and ask yourself:
What will be my personal mission?
How much will I need to accomplish my personal mission?
Are insiders the best choice for a successful transition to accomplish my personal and financial goals?
What is my business value and can it satisfy my financial goals?
Exit planning is not done in isolation by your attorney, CPA, or financial advisor. You need a business advisor that can help you define and accomplish your goals and objectives and collaborate with your other advisors to make sure your goals and objectives are met.
If your business succession plan only involves your attorney, CPA or financial advisor your plan is incomplete.