Like many people, I often get asked “So, what is it you do?”
I usually start with a high-level overview, such as “I help people buy, sell, value, and improve their business.” If pressed, I elaborate on each of the areas I listed, because each dimension has its intricacies & nuances. That’s usually when the topic of exist strategies versus succession planning arises.
“Selling” a business is a concept most people understand: it’s the culmination of a sequence of events that starts with maximizing a business’ value by implementing systems, ensuring continuation of management, etc.
In contrast, the unique distinction of “succession planning” versus “exit strategies” tends to cause a lot of confusion. Like “marketing” and “advertising,” they tend to be thought of as the same, rather than complementary. Many times, people think they’ve done one when they really have done the other – or, even more likely, they’ve done a bit of both rather poorly.
In this article, I define and differentiate the two, and explain how they’re unique but equally valuable sides of the same coin.
What is an Exit Strategy?
An “Exit Strategy” is a high-level activity. Basically, there are only four ways to exit a business:
- Cease operations & liquidate (typically the least favourable option for current owners)
- Sell/Transition to a family member
- Sell to a business partner/employees/current management
- Sell to an outside party. Next question – what type:
- A Strategic buyer (someone in the same or similar industry, with specific reasons to buy your business, and therefore willing to pay top dollar)
- A Financial buyer – looking to maximize his return (and therefore pay you less)
- An Individual
Working on your exit strategy means determining which of these is best for you.
What is a Succession Plan?
Succession Planning presumes the above decision has been made and works on the details of the plan. Succession planning allows for the orderly transfer of ownership and management of your business, ensuring that your retirement goals become reality and your business will continue to flourish.
Making the first decision “My son/daughter will take over” is not a “succession plan.” (It’s not even a viable exit strategy if it wasn’t discussed with your son/daughter!)
What’s the Difference?
As discussed previously, exit planning helps you set the macro direction of your business’ exit plan, while succession planning gets in to the “nitty-gritty.”
Creating an Exit Plan
These five questions should be asked by all business owners as they contemplate exiting their business:
- Who – “Who can take over my business? Who can pay me the most for it?”
- What – “What shall I sell?” this speaks not only of legal issues (shares versus assets), but also what is the true value of your company.
- When – “When do I want to get out?” This is a key question – you should determine your own timetable, rather than let circumstances (health, etc) determine it for you.
- Where – “Where do you want to retire to?” OK, maybe not so relevant to your business, but relevant to you!
- How – “How to get out?” This is the million dollar question – Structuring the deal and planning in advance can maximize your after-tax wealth dramatically.
Exit planning is one step before succession planning. It asks the big questions, and helps you see clear to the answers, while succession planning works on the details. Call us today for a free, no obligation, initial consultation.
I Know My Exit Strategy, So Why Do I Need a Succession Plan?
Many business owners have a “warm and fuzzy” intention to transfer their business to their family members without assessing their competency or establishing a concrete action and training plan.
Handing the family business over to your children is complex and risky. Preparing it for an external sale is even riskier. Proper succession planning is complex, involving many different issues to consider:
Transaction Issues
- Tax issues
- Legal issues
- Retirement planning
- Financing
- Finding a buyer
Business Issues
- Choosing a successor
- Training the successor
- Roles & responsibilities
- Monitoring progress
- Dispute resolution
Family Issues
- Fairness
- Emotions
- Working together
- Competence
- Dispute resolution
In addition to a more successful transition, planning in advance lets you take advantage of significant tax savings the government allows on the transition of private companies. While tax considerations shouldn’t drive all of your decisions, these creative tax structures and estate planning tools enable you to defer (or even avoid) significant amounts of taxes – if you plan early enough.
A good succession plan can increase the value of your business by 30% or more. You should be planning now if you plan to exit your business within the next three to five years.
Succession Planning for Your Business (Whether You’re Selling Or Not)
No one is (or should be) indispensable in their business. Business owners need to consider: one day, you will be no longer able to run your business. No one likes talking about the four “D’s” of business ownership, but we all need to plan for the worst. As a business owner especially, you have people counting on you (your clients, your employees, your family).
The four “D’s” are:
- Death
- Disability
- Divorce
- Disagreement amongst partners
You, and your partners need to have a clear action plan and a shareholder’s agreement that would address these issues. You should have a plan to ensure there are systems and processes that run the business without you. But even with the best systems, there will still be some decisions and work that only the business owner can do. Therefore, it is essential you have back-up plans and contingencies to ensure the on-going survival of the business even if something catastrophic happens to you.
Specific questions to ask yourself:
- What would happen if you die or become disabled?
- Do you have a plan to retain key employees?
- Do you know what your business is worth?
- Do you know how to increase its value?
- Do you have a Buy/Sell agreement if you have partners?
- Do you know where the money would come from to finance that acquisition?