Small Business Tips: Exit Planning vs. Succession Planning
How Does a Small Business Owner Prepare for Life Beyond Work?
Succession planning and exit planning are two terms that many people use interchangeably. This is understandable, since both phrases are associated with business owners planning for retirement. However, the two concepts have slight differences, and the crux of those differences is what those planning strategies target. Succession planning centers on the continued financial health of a business after its owner or chief officer retires or dies. Alternatively, exit planning focuses on the wealth of a business owner who’s retiring and wants to transfer ownership or close a business down.
With all the complexities, finances, and emotions connected with retiring from a small business, it’s important for small business owners to understand how succession and exit planning differ. While some elements of the two concepts may be similar, the endgames are not. In this article, we take a closer look.
As a small business owner, you may be wondering whether exit planning is right for you. Exit planning is typically associated with business owners who want to sell their businesses before retiring. In this regard, the owner focuses on their own financial health. So, in this scenario, your goal is to make your business as valuable as possible for when you finally depart. Before selling to another party, you’ll want to be very clear on its true value. This involves a thorough review of assets, liabilities, operating expenses, financial statements, and other factors. Check out this guide for four steps you can use to get started on a valuation for your business.
Aside from the financials, exit planning involves developing a list of potential candidates to sell to. Keep in mind that you aren’t necessarily looking for a successor, as you would if you were hoping to pass the business on to someone who will continue operation in much the same way you would, but rather a buyer. The pool of potential buyers can include individuals, private equity firms, venture capitalists, and even competitors who may be worthy candidates.
Exit planning can be much more detailed in financial concerns than succession planning. It’s about building business value along with personal wealth. If your retirement date is still years in the future, consider how to use the time you have to make improvements and changes that can increase your company’s value.
Small businesses are the backbone of the American economy, and many of them are family businesses. Often, a family member will be in line as a successor, though it’s not always as cut and dried as that. In the most successful scenarios, business succession is a written plan, with the goal being clarity on who is going to take over the owner’s responsibilities when they leave the company, how the process will unfold, including training and timeline, and any other details essential to your particular business.
Succession planning is essential for a key reason: the future is unpredictable. A small business owner may have detailed plans for the process of stepping down. However, issues may arise that impact those plans — such as unexpected death or illness. Since we can’t predict the future, it’s smart to get a plan in writing now, even knowing that it may need to evolve later. The succession planning process can take longer than many business owners might think, and below we’ll examine important steps in the process.
The Succession Planning Process
After identifying what roles and responsibilities the owner will pass on, candidates for succession are determined. This step involves the assessment of the talent at hand through evaluating past performance reviews and skill sets, as well as interested family members who may not have had an active role in the business up to this point. Leadership potential may be of particular focus because you’ll need to ask yourself whether each candidate can run the company effectively.
Once candidates are identified, they often go through a development process. The more comprehensively the successor is prepared, the easier the transition is likely to be in the future. This can be accomplished through hands-on training, mentoring, skills assessment, and continued on-the-job experience.
Transparency and honesty are hallmarks of good small business management. This is especially crucial in communicating succession plans, particularly if the business has multiple employees or interested family members. With all the emotions that accompany major life changes, it’s often helpful to be up front about the transition plan to all who will be affected.
Exit Planning vs. Succession Planning: Stepping Down into Your Future
Depending on where you are in your career, you may not yet know whether exit planning or succession planning will be right for you. However, it’s smart to educate yourself now and understand the differences between the two, as well as learn some of the steps you can begin taking now to prepare for a future transition.
Getting a succession or exit planning strategy right is critical. Consulting a financial professional with experience in these areas can help protect both your company’s future and your own financial security. If you’d like to speak with a member of the Paces Ferry team about future planning for your small business and for your personal assets, please reach out today to schedule a conversation.