Seven Considerations When Creating a Successful Succession Plan


Key Considerations in Exit Planning 

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Key Takeaways

  • A successful succession plan includes both your business goals and your personal financial options.
  • Understanding the value of your business is a key first step. Remember, this value is not set in stone. The sooner you plan, the more time you’ll have to prepare.
  • Business continuity is a critical component of succession planning. You’ll want to think through how an ownership structure shift or sale will impact your organization.

After a lifetime of hard work and building a successful business, there is much to think through as you consider the first steps in transitioning. Where should you start? What do you want to accomplish now and in the future? Are you forgetting critical elements?

Below are seven key steps to help start creating a successful exit plan.

1. Identify Exit Objectives and Goals

Identifying your exit objectives and goals is a crucial first step in making the decision to leave your business. The process of letting go can be difficult, especially if you have invested years of your life building the business. In fact, 76% of business owners who sold their businesses profoundly regretted selling within a year. By defining clear goals and objectives, you can make the transition much smoother.

One important aspect to consider is the timeline for your transition. By determining how long you want to continue working in the business before exiting, you’ll give yourself and your business a clear and prepared timeline to work towards.

Further, discussing your goals and objectives helps you create a roadmap for success. Ask questions like:

  • Do you want to sell the business to a family member, employee, or an outside party?
  • What sort of price are you looking to achieve on the sale?
  • What are your post-sale plans?

It can also be important to consider value-based objectives such as family harmony, legacy, maintaining culture, providing for employees and your community, and how to best minimize taxes. By addressing these objectives upfront, you can ensure that your exit plan aligns with your values and goals, leading to a less overwhelming transition.

2. Quantify Business and Personal Financial Resources

As you plan for your exit, make sure you have a complete understanding of your business’s value and your personal financial resources. This will help you to accurately determine what you need in order to transition out of the business and maintain your desired lifestyle.

To start, assess your business’s worth and projected cash flow. This will give you a realistic idea of what you can expect to receive from the sale or transfer of your business. Understanding the financial health of your business is also important when it comes to negotiating with potential buyers or investors.

Additionally, it is important to identify your personal financial resources, or nonbusiness assets, such as retirement funds, income-producing real estate, stocks, and bonds will help set a clear picture of your financial situation after you exit the business.

3. Business Value Enhancement

Another essential step in preparing for a successful transition is to conduct a business valuation to assess the worth of your business. A valuation provides you with an estimate of your business’s value and is often required by potential buyers to evaluate their investment.

A business valuation is also a helpful tool to estimate if the business is worth enough to support your post-sale needs. Remember that a business’s value is relative – not fixed. The value can vary based on the reason for transferring ownership and on the conditions under which a transfer is made.

There are several value drivers taken into consideration when estimating business value. These include the management team, current operating systems, consistency and age of the customer base, condition of facilities, growth potential, effective financial controls, and expected future cash flow. Knowing the value drivers specific to your business can provide valuable insight into areas where you can make improvements to enhance its overall value.

4. Ownership Transfer to Insiders

Transferring ownership to insiders, such as co-owners, key employees, or through an Employee Stock Ownership Plan (ESOP) is a common exit strategy for business owners. It can also involve selling or gifting the business to family members.

The benefit of transferring ownership to insiders is that they are familiar with the business’s operations, culture, and customers, which may lead to a smoother transition. This transfer method also allows for continuity of business, which can be important if you have established a loyal customer base or have a unique company culture.

To transfer ownership to insiders, it is essential to have a comprehensive plan in place. This plan should outline how the transfer will be financed, the terms of the transaction, and how the new owners will manage the business after the transfer. Transferring ownership to insiders also requires trust and open communication. It is important to ensure that all parties understand their roles and responsibilities, and to set clear expectations for the transition process.

5. Ownership Transfer to Third Parties

Another exit option is to sell to an outside party. This could be an industry participant, a supplier or customer who is looking to integrate vertically, or a private equity fund.

Selling to an outside party can have several benefits. First and foremost, it can often result in a higher sale price than transferring ownership to insiders. This is because outside buyers may be willing to pay a premium for the business due to factors such as strategic fit, market position, and growth potential. Third party sales can also provide the seller more flexibility in terms of the timing of the sale and the structure of the transaction. This can be especially important for sellers who are looking to maximize the sale price and accelerate the payment of proceeds.

However, there are potential drawbacks to selling to an outside party. For example, the new owner may have different goals or values than you do, which could result in changes to the business that you may not agree with. As with any exit option, it is important for you to weigh the pros and cons carefully before making a decision.

6. Business Continuity Planning

Another important item to consider is ensuring that the business continues to operate effectively after you exit. A well-crafted continuity plan helps ensure a smooth transition, minimizes disruptions, and ensures the company’s long-term viability.

Consider the impact an ownership structure change could have on current management and employees. For example:

  • If you’re the sole-owner, how will transitioning to a multi-owner structure change the management team’s dynamics and responsibilities.
  • If you’re leaving the business to your family members, will they have the necessary skills and experience to manage the business effectively?
  • Will the transition cause a loss of financial resources, which could impact the company’s day-to-day operations?
  • Will new positions need to be created, or will existing ones need to be restructured due to the loss of your talent in the business?

By asking these types of questions early on, you can help prevent the loss of employees and customers during and after the transition.

7. Personal Wealth and Estate Planning

Your personal wealth and estate planning should align with your business planning and exit strategy. Selling your business will likely result in significant changes to personal and family cash flows as well as substantial tax implications. Therefore, it is important to ensure that your personal wealth and estate plan is structured to preserve wealth and minimize taxes using various planning tools.

An effective personal wealth and estate plan should take into consideration various factors, such as family dynamics, charitable interest, and long-term financial goals. This plan should also include an analysis of tax laws and the potential impact of these laws on your personal and family finances.

Working with experienced professionals, such as financial and estate planning advisors, can help you develop and implement a comprehensive personal wealth and estate plan that aligns with your business planning and exit strategy. This can help ensure that your hard-earned wealth is protected and that your legacy is preserved for future generations.

It’s Never too Early to Start Exit Planning

Each of these considerations require thought, time, and planning. Not only will you need to take time as the business owner to review these items, but you should also reach out to other key stakeholders and business advisors to get input.

Whether or not you are ready to exit your business now, it is important to begin thinking about a succession plan that will work for you. A truly successful succession plan navigates the financial, emotional, and tax considerations with your goals and objectives in mind.

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