My professional experience has reaffirmed that a business owner cannot commit to the difficult emotional process of replacing themselves (succession) until they can clearly envision their financial future (exit plan) and accept the reality that they will not outlive their money in retirement.

An exit plan is a necessary tool that will assist the business owner in controlling and visualizing the process of transferring and monetizing their business while getting a better understanding for the financial aspects of the transaction. Since approximately 70 percent of a business owner’s wealth is trapped inside their illiquid business, this should become a top priority.

Exiting can be a risky process. Several business studies have concluded that:

  • Fewer than 30 percent of businesses will transfer or sell to employees, managers, or family, ending in liquidation, or 10 percent of the business value, for the owner.
  • When selling to an outsider, fewer than 20 percent of the companies that are brought to market close. According to FMI, that statistic is closer to 10 percent with contracting companies.

These are sad statistics since most owners fumble the ball in the “red zone” of their career, leaving a sad legacy for the company, employees, family, spouse and community. If you’re fortunate enough to sell or transfer, you can be sure that Uncle Sam will be waiting for his fair share, which can range from 0 to over 55 percent. Ouch!

Exit vs. Succession: In Brief

In the simplest terms:

An exit plan focuses on monetizing the business’ trapped illiquid wealth without being clobbered by taxes, changing an owner’s lifestyle and not running out of money in retirement.

A succession plan focuses on the company successfully performing without the present owner by moving management into leadership, ownership, and eventually replacing the empty CEO’s chair.

An exit plan provides a customized written plan that monetizes the business, meets the owner’s personal and financial goals, protects their wealth and moves the owner into their next stage of life.

A succession plan provides a customized written plan that focuses on the human side of the business. Succession replaces the owner by moving the chosen performers to a professional level of management, leadership and even to CEO/ ownership. This requires time, training, facing blind spots, stretching and coaching the team.

The Exit Plan: In Detail

The exit can be difficult and taxing on a financial and emotional level. This complex process requires specialized advice from a team of advisers including an accountant, business appraiser, tax advisor, corporate attorney, estate planner, financial advisor and insurance advisor, among others. Coordinating and understanding the often-disjointed advice can be overwhelming to the owner who is pre-occupied with their business and unfamiliar with the process.

An exit planner, much like an architect, is trained in all the disciplines above and creates a comprehensive, holistic and cohesive plan with many options based on the owner’s goals before going to the advisers for final review to implement the plan. The exit planner’s process would be analogous to a design-build construction project.

The exit is also taxing financially, where an owner can surrender literally more than half of earnings to taxes on the corporate, personal, state and federal levels. To make it more complicated, each path has a different value, tax consequence and comes with unique compromises.

Writing and creating the plan can take between four and nine months and will determine your options for exiting your business. Why is this process so important? This is probably the owner’s largest asset, the largest financial event of their lifetime, and their final opportunity to execute the exit and secure a comfortable retirement. You need to get this right the first time.

After the plan is written, strategize to reduce or eliminate taxes by properly structuring, aligning and positioning the company and the owner in order to meet the complicated regulations. Then, implementation can easily take over a year to align the structure best for  the company, the buyer and seller.

Beyond the benefits to the owner, an exit plan also:

  • Maximizes business value
  • Leaves an “intentional” legacy
  • Minimizes or eliminates taxes
  • Controls how and when you leave
  • Creates a written plan to follow and measure
  • Protects employee succession and harmony

The five transfer options (sale, recapitalization, employee stock ownership plan, management buyout, and gifting) all have different motives, ranges of value, tax implications, structures and fees.

A written exit plan defines the owner’s goals, the salient parts of wealth (liquid and illiquid), the value of the available options, the “net” amount after taxes and fees, tax implication, titling of all assets to assess estate tax exposure, legal agreement review, insurances, financial planning and investment considerations. An exit planner’s role is to design and to quarterback this process during the execution with the accountants, lawyers, tax professionals, insurance advisors and wealth consultants.

In Succession

The succession plan is about preparing the company to succeed in the absence of the owner/CEO. In broader terms, it’s about building value, creating a culture of continuous succession, delivering a top-quality product to your customer, establishing reoccurring cash flow and protecting the future of the company by:

  • Establishing a clear direction and focus
  • Professionalizing the company and management team
  • Developing and improving management systems
  • Developing and training of the human capital
  • Training for teamwork (their blind spots) and leadership (focus on others)
  • Lock in key players
  • Selecting the new stockholders (owners)
  • Moving them into ownership (focus on the company)
  • Selecting the new CEO

A succession plan can take several months to write but several years to execute. The goal is to have the company run without the owner/CEO. Depending on the readiness of the management and the type of exit and current payout, a succession plan may run over three to 10 years. On the other hand, if the business is systematized, has clean financials, mature management in place, and the owner can take a two-month vacation, the company could be “sale ready” in less than a year.

Where to Begin?

My professional view is that the owner must first deal with the exit plan, so they can ensure and envision their financial future. This then liberates the owner to focus on succession, so they can build the championship team that allows them to let go in order.

The exit plan leads the owner through a comprehensive proprietary process that will meet their personal and financial goals while objectively examining their options for monetizing and protecting their hard-earned wealth. Once the owner is comfortable with meeting these exiting goals, they can move into the succession goals of identifying who will be the next leaders and the CEO of the organization.

Succession is a continuous process in a best-of-class company. Annual programs should focus on developing bench strength and stretching associates, not just the replacement of key positions. In this scenario, the company would always be near a sale-ready condition.

The great news about succession is that it adds bottom financial value no matter if the owner sells internally or externally. External buyers are looking for a strong management team since the owner will be absent.

The key is to start early. Exiting and succession are not events, but a complex process that takes time. The exit plan will get you started, and the succession plan will bring everything together to allow you to gracefully exit your business, protect your wealth and leave an intentional legacy.