Seven Steps to Creating a Successful Succession Plan

January 4, 2020 | Article

After a lifetime of hard work and building a successful business, there is much to think through as you consider the first steps in moving beyond your business. Where should you start? What do you want to accomplish now and in the future? Are you forgetting about critical elements? Below are seven key steps to help get you started on creating a successful exit plan.

Step 1: Identify Exit Objectives and Goals
Making the decision to leave your business is often a difficult one. You’ve spent your life building your business, and letting it go can be a challenge. However, if you identify clear goals and objectives, the transition can be much easier.

Determining how long you want to work in the business before retiring or moving on gives you and your business an expected timeline for departure. Importantly, it gives you something to work toward.

Talking through your transition goals and objectives helps you create a roadmap for success. Ask questions like:

  • Do you want to sell the business to a family member, employees, or an outside party?
  • How much money do you want to make on the sale?
  • What do you plan to do after the sell is complete?

In addition, taking time to consider value-based objectives such as family harmony, legacy, maintaining culture, providing for employees, your community and how to best minimize taxes fits nicely into the goals and objectives category.

There are a number of factors that play into your exit plan. Each piece is vital to the success of your transition.

Step 2: Quantify Business and Personal Financial Resources
As you plan for your exit, make sure you have a complete understanding of your business value and personal financial resources, as well as what you need after you transition out of the business.

What is your business worth? What is the expected cash flow? Identifying your personal financial resources (nonbusiness assets) such as retirement funds, income-producing real estate and stocks and bonds will help set a clear picture of your financial situation after you exit the business.

Step 3: Business Value Enhancement
It’s important and beneficial to do a business valuation as you prepare for an exit. In fact, many buyers require one to show them the business’s worth. A business valuation will also determine if the business is worth enough to support your needs and establish the fair market value.

It is important to remember that business value is relative and 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 that are taken into consideration. These are the management team, current operating systems in place, an established and diversified customer base, the facility appearance, a realistic growth strategy, effective financial controls and a stable and increasing cash flow. Knowing the numbers makes you more aware and prepared for the transition.

Step 4: Ownership Transfer to Third Parties
One exit route for business owners is to transfer ownership to a third party. During this process, the seller generally works to maximize the sale price and accelerate the payment of proceeds. Some different external transfer options include an orderly liquidation, recapitalization, a third party or an IPO.

Step 5: Ownership Transfer to Insiders
The other exit route for business owners is to transfer ownership to one or more insiders. These could be co-owners, key employees, a group of employees through an ESOP, or children who are sold or gifted the business. There are many things to consider when transferring your business to either a third party or to insiders. Analyzing the benefits and drawbacks will help you make an informed decision based on your goals and objectives.

Step 6: Business Continuity Planning
Another key step is to make sure your business continues even after you have left. Consider the impact an ownership structure change could have. Are you a sole-owner transitioning to a multi-owner structure? Will a transition cause a loss of financial resources for the company? Will new positions need to be created due to the loss of your talent in the business? By asking these types of questions early, you can help  prevent a loss of employees and customers after the transition and  ensure success once it is complete.

Step 7: Personal Wealth and Estate Planning
Your personal wealth and estate planning should absolutely be included in your business planning and exit strategy. The transition of ownership or the sale of a business will generate cash for owners, their families and the IRS. Your personal wealth and estate plan can preserve wealth and minimizes taxes by using both lifetime and death planning tools, as well as put you on the path to attaining your final objectives.

Exit planning has a big impact on more than just your business. Learn more about how estate and gift taxes play a factor in your decision.

It’s Never too Early to Start Exit Planning
Each of the steps listed above require thought, time and planning. Not only will you need take time as the business owner to review these steps, but you will also need to reach out to other key stakeholders and business advisors.

Whether or not you’re ready to exit your business now, it’s 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 all with your goals and objectives in mind.

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