The terminology surrounding the field exit planning for entrepreneurs and business owners can often be confusing. Many people believe that exit planning and succession planning are synonymous, but they are not.
What is Succession Planning?
An existing business owner conducts succession planning when he or she goes through a process to identify potential successors in the organization and works with the prospects so they can gain experience and skills necessary to grow into leadership positions for the future. While there is not a single, clear business succession definition, the focus of the succession planning process is on the transfer of management and leadership following the departure of the existing leader. This may dovetail with exit planning, as it is one of the potential approaches towards business continuity, an essential part of exit planning.
In order to ensure a successful succession plan, whether it is for business succession planning or nonprofit succession planning, there are several keys any business owner should consider:
1. Start your succession planning process early. If possible, start planning for a successor even before you have determined the major portions of your exit plan.
2. Approach your succession plan with a lot of flexibility. You may have an idea on the front end of what your succession plan will look like, but you should leave room for your plan to evolve, as you get deeper into the process.
3. Do not settle for just one type of succession planning technique. Diversify your succession-planning model for a well-rounded plan.
4. It is a good approach to bifurcate control of the company and equity.
5. Take time to analyze how you might be able to transfer your tax savings.
6. Consider a number of non-tax related issues as well, including how your remaining employees may cope and work through a succession plan and exit plan that has some employees leaving the business.
Business exit planning, in contrast to succession planning, is more leader-centric and requires an analysis of numerous factors that affect the business owner or key leader that is considering leaving or selling the business. The issues that come into play with exit planning strategy include current planning and future planning regarding the business, and the owner’s family and community. Because it begins with the perspective of the business owner rather than the business itself, exit planning for business owners takes into account personal goals and objectives, and also impacted greatly by the personal resources of the owner. The process of exit planning is intended to determine next steps and strategies to assist the owner reach personal goals for the future.
Some owners spend a lot of time considering succession planning but do not consider their own exit plan because they always intend to deal with that issue later down the road. The problem with that approach is that the need for an exit plan won’t always be clear ahead of time, and in order to put together the best exit plan for you and your family, you want the benefit of time to carefully put together your exit plan. Some reasons for getting started early with an exit plan, long before you plan to need it, are as follows:
1. You may get another offer that you didn’t expect at any time. If you are leading a successful business, you probably are not the only one that noticed. You may receive offers to lead another business that comes through your personal networks. Alternatively, your business may be sought after by a larger company looking to grow through an acquisition. Regardless, an attractive offer can come at any time, and you may not have much time to make a quick decision once it does.
2. Health issues for you or your family members can arise at any time and typically occur without warning. During a family crisis, you do not want to have to spend time away from your family dealing with exit planning concerns.
3. Changes in the economy can happen quickly and without warning. In a matter of weeks or months, a recession can occur that might negatively impact your business in a significant way that might necessitate you moving on.
4. Market changes are another reason to plan thoroughly and plan early. Maybe the market for your product or service will take off quickly or maybe your once-in-demand product will fall out of favor with consumers. Either way, you want to be prepared to move if the market requires you to do so.
5. Planning early allows you to look closely at your options, so that if you decide you want to sell your business in a hurry, you aren’t stuck with the first offer you can find, which often is not the best offer out there.
6. As much as you may not want to think about it, time slips away quickly, especially for busy professionals. The best intentions to get started soon on an exit plan can easily get pushed to the back burner as other, seemingly more pressing issues arise. However, keeping an eye on your exit strategy will help you ensure you can capture the value of your company at the time you decide to step away.
7. Even the most successful business person may start to realize at some point that the current position they are in is not fulfilling them in the way it once might have. Even owners can feel as though their current gig is not all they though it would be. It is natural for business owners to grow weary of the same day-to-day challenges faced by even the most successful business. The wear and tear associated with the stress of running your company may catch up with you more quickly than you think, and it is good to have an exit plan in place that will allow you to walk away and reap the benefits of your hard work when you decide the time has come to do so.
Because the value and viability of the business are often key considerations for both exit planning and succession planning, the two processes are not incompatible. It is common for owners to work with professionals, such as attorneys, accountants, and business planners, to ensure their business succession plan compliments their personal exit plan.