Succession Planning Part 1: Establishing an Exit Strategy

Business owners must wear multiple hats, especially when founding and building a business. In addition to providing their key services, they likely are involved in marketing, finance, developing operations and more.

However, one added task that too many business owners overlook is planning for the day they step away from their companies. In particular, many neglect to consider what their succession/exit will look like, as well as how their estate plan fits into that picture.

These two eventual business considerations are intertwined. For example, failure to plan for the possibility of the owner's untimely death could force the family to continue running the business and plan its future needs all while mourning a loved one. It could take years to sort out the complexities, costing the family a significant amount of time and money as professionals are hired to handle the unplanned-for transition.

As you consider your exit strategy and actual succession, as well as how that fits into your estate plans, contingencies must be covered. However, you also need to take a broader view of how everything works together.

To start that process, this article covers succession and exit planning. Merging that into your estate plan will come in a future piece.

Evaluate future business leaders

The first objective of succession and exit planning is to ensure that the value you have built over many years is maintained during transition to a new owner. Some questions to consider:

  • Do you want to sell the business to an outside party and completely remove yourself and your family from future operations? If so, working with a consultant to maximize the value of the business can be invaluable. He or she can help get systems in place that will make your operations attractive to specific types of buyers.
  • Do you want to transfer ownership to your children? It's important to expose them to the operations of the business early so you can recognize their natural gifts and abilities. Your mentoring can help them develop into company leaders. Or you may be forced to make the difficult decision to bring in an outside manager if your children's abilities don't align with the business' needs.
  • Do you want to sell the business to your employees? Just like transferring ownership to your children, it's important to identify and nurture employee talent early on. As you hire, think about what each staff member contributes to the future of the business after you're gone.

Don't delay

It is critical to consider these issues and start taking steps to move towards your desired outcome. Involve professionals in these plans and communicate with all parties, as well as your family, about what direction your exit plan will take.

The last thing you want is a rushed sale of the business in the event something happens to you. This could significantly compromise the financial future of your loved ones and derail carefully constructed estate and financial plans.

Even if your family decides to retain the business, operations could be severely disrupted during the process of sorting out new leadership and management responsibilities. We've heard of situations where payroll is not processed for months at a time and profits plummet during the changeover. Would your employees stick with the company during such a difficult transition?

Create a flexible plan

The best succession plan is one that prepares your business so that it can be sold or transferred at any time. That's certainly easier said than done, but professional consultants and planners can assist with this process.

Lastly, don't let the perfect become the enemy of the good.

Many people become paralyzed when faced with the complexities and challenges of succession/exit planning and estate planning and never draft or execute required documents. You can always get something in place now and revise it going forward as you make more decisions and gather additional information.