Focusing on long-term planning is essential for business owners. Still, business owners tend to overlook or delay one of the most critical issues for the businesses’ long-term plans, which is what happens when you are gone, and how/when do you want to transition out of your business?
What is Business Exit and Succession Planning?
Business exit and succession planning involves determining the end game for you as a business owner. What are the long-term plans and desires for your life’s work? This can vary widely from person to person. Whether you’re of the mindset that you’d like to pass the business on internally, sell to a third party, or never retire, all will require developing an effective strategy and plan with built-in contingencies.
Creating an effective plan or strategy in and of itself can take some time, as there is a lot to consider: what the ultimate goals are, who the key players are, any contingencies, what needs to be accomplished, and the timeline for all. Once the strategy framework is in place, executing the strategy can take years, especially if things don’t go as planned. For example, you might have to train your desired successors properly, you may have to clean up your books and get your finances organized, you may have to identify interested buyers, you may need to secure funding for your buy-out, or if you don’t want to retire, you’ll have to determine what that will entail — including what happens to the business if you can no longer work. This process may take longer than anticipated, but be prepared to prioritize these areas. After all, if they’re not addressed in a timely fashion, it could lead to you not being able to exit on desired terms.
There is a fair amount to consider when planning for your exit or succession, so this will be divided into a multi-part series. In this article, I’ll outline the fundamentals or base of the strategy, which is focused first on determining your own needs and goals.
Where to Start In Your Business Exit or Succession Planning
The fundamental component of the plan starts with you and your personal goals/needs. The following five areas should first be considered:
- Basic Financial Needs: What are your basic cash flow needs for financial independence, and how do you know your calculations are accurate?
- Financial Desires: Beyond basic living expenses, what are your wants and desires?
- Ideal Successor: Who would you want to take over as the owner of your business?
- Timeline: When would you like to exit the business, or transition to less time working?
- Values-Based Goals: What, beyond the basics, are important to you?
Let’s examine a few of these areas individually, so you can better understand how to proceed as you plan your company’s future.
Begin with the End in Mind…Even If It Might Change Over Time
Even if the end isn’t a complete exit or transition, having a rough construct of your end goals is beneficial so you can begin strategically planning for them. Factors can change frequently, such as economic shifts, business growth, or decline, influencing the timing of your exit.
Whether it’s a full or partial exit, this type of planning generally requires time. Starting early allows you to set yourself up for a higher probability of success in your exit strategy. Early planning also offers the flexibility to pivot as needed. Alternatives to your initial plan are crucial because circumstances can change significantly within short periods, such as in one-to-five-year increments.
At a core level, many business owners have some idea of their transition or exit strategy. It often comes down to either passing the business along to a family member or folks within the company or selling it to a third party.
It’s great to have a rough idea of what your exit might look like. However, you need to get more detailed about your specific desires. Do you want to fully exit and sell your business to a third party at the highest price? Or would you prefer to see the company continue to grow with a chosen successor who can maintain the business culture you value?
Financial Independence and Stability Following Your Exit
One of the most universal and foundational aspects to plan for is achieving a basic level of financial independence. This might sound obvious, but it’s crucial. Most business owners understand this; it’s just good common sense. What will it take to achieve your basic financial independence?
Beyond that, consider your financial desires. Everyone has basic living and discretionary spending needs, but what about your financial goals beyond that? Are you planning to buy a second home? Do you need to maintain multiple properties? Are there other goals and ambitions, such as supporting children or grandchildren? These fall into the financial “wants” category, but must also be included in your planning.
Be careful to ensure your future cash flow needs are accurate, accounting for things like inflation, changes in expenses, expenses no longer paid by the business, etc.
Think About the Ideal Successor For Your Business
Next, consider the business itself. Will it be sold to a third party, passed to a family member, or handed over to a management team? This plays into your timeline. Does your management team know you want them to be your successors, and are they in agreement? If not, what are the contingency plans? Will anyone require grooming or additional training, such as a family member or management team?
If selling to a third party, will there be an onboarding period where you remain involved in the business to some extent? Will you need time to clean up the business finances, optimize your valuation, or implement strategic metrics for potential internal successors to ensure the ongoing profitability of the business and their ability to buy into the business?
What Timeline Is Appropriate for Your Business Exit or Succession Planning?
Refining what succession looks like is essential. Another key factor is your timeline. Are you ready to commit less time to the business? Have you worked hard to build it and now feel tired? Is your timeline short, or do you have a good runway to establish your succession plan?
Reflect on Your Values-Based Goals Before You Make Any Final Decisions
Values-based goals include considering if a family member, such as a child, will take over the business. If so, do you have other children you want to account for regarding what they receive as your legacy? How will you plan for that?
Other values-based goals could involve charitable giving. Would you like to donate to charity, and would you like to continue doing so? Does your business impact the community, and do you want it to? Beyond community donations and sponsorships, consider if local folks in the community work for your business. If you sold to a third party, would your local employees continue to work for the company?
Values-based goals include considering potential estate taxes or significant income taxes upon selling. Do you want to minimize the tax impact not just for you but also for future generations?
Other Items for Consideration in the Initial Planning Phase
Some other items to consider as you take stock of what you have, what you need, and how your potential exit might shape up:
- Do you have a spouse who works, and does that spouse have a pension?
- What will your Social Security look like?
- When will you file your Social Security election?
- What will your Social Security monthly benefits look like if you are married between you and your spouse?
- What financial assets do you have now?
- What growth rates can be assumed for your assets until you exit the business?
- What is your business valued at now?
- If you are going to sell your business to a third party, what do you think you can get for it in the years to come, and how are you estimating those valuations?
- Do you need to consult with professional service providers for assistance, if so, who?
- What are those things you need or desire going to cost in the coming years?
Don’t Be Afraid to Consult with Experts While Planning Your Exit
When planning, it’s crucial to investigate these areas, often through fact-finding, to address each specific aspect. This process will determine the optimal strategy, and which professionals must be involved. You may need a valuation expert, tax attorney, financial planner, investment advisor, or accountant to assist with strategy development.
While you might shy away from hiring a third party to help you, these individuals can give you more insight and allow you to see further options you might not have identified yet or even factors you may have ignored or forgotten. Being as refined and accurate as you can be in the initial planning phase and throughout the process can prevent major blowups or catastrophes down the road. For instance, if you’re over assuming the value of your company and underestimating your future expenses that can increase the odds of not having a successful exit and doing the things you’d like to.
That’s why it’s often also a good idea to take stock of A) what you have and B) what you need, not just financially but also from a professional assistance standpoint.
Take Steps to Plan for Your Exit and Leave Your Business in Good Hands
After organizing the basics that are critical for the framework of your exit plan, the next phase would be to conduct a gap analysis. In essence, that is considering all that you have in terms of assets and your business value, what asset levels (including your business) you’ll need to reach to achieve your future exit/succession goals, and how much time you have to reach the required level of asset growth. Once that is completed, you can get into the specifics of the particular design for your exit plan, including how you will grow the business in the interim, as well as other asset accumulation strategies, and ultimately the structure of your exit and all that’s involved.
I’ll touch on the next steps and exit strategies in future articles, but in the meantime, I hope this is a helpful start in determining what to think about and get organized around in a business planning area that can often be overlooked or delayed for too long.
Jerry Maddaluna is the founder and lead financial advisor/financial planner at Luna Financial Group. Luna Financial Group engages in comprehensive financial planning partnerships with business owners to provide personal financial planning, outsourced personal CFO services, and assist with business planning needs, such as retirement plans, buy-sell planning, organizational structure, income tax planning and reduction strategies, optimizing valuations, employee retention strategies, and succession/exit planning.
