By: David M. Bastiaans
The difference between business ‘succession planning’ and ‘exit planning’ is huge! The former is a means to an end and the latter is charting a course to an end.
Business Succession Planning. I am sure most business owners have heard of ‘business succession planning’. Their attorney, CPA, or financial advisor may have mentioned that they need to have a business succession plan. In most instances, the advisor suggests a strategy whereby the business owner considers a 3 - 5 year timeframe to properly train and transition the business to some successor. The identified successor is usually an insider – management, key employee, or family member working in the business.
The advisor works with the business owner toward the succession plan. They have identified the heir apparent and slowly transition more responsibility to the successor. We want the successor committed to the plan, so we may even offer the successor some small ownership interest now with a carrot of full or majority ownership in the future. If all works as planned, the business owner exchanges his ownership interest for some payment or more likely stream of payments. Sound familiar? What is wrong with this plan?
In large part, there is nothing wrong with this plan and, in fact, this type of transition may be part of a larger scale exit planning engagement. The problem with this type of plan is what other options were considered. Did the business owner succumb to the path of least resistance (i.e., transfer to an insider) or did they truly consider their options and discover that the insider is actually the best choice? Without an overarching exit plan, the answer is clear. The business owner did not consider all options because they limited their options to an insider buyout.
Exit Planning. ‘Exit planning’ is simply good business! Exit planning is a process of merging the business value with the personal and financial goals of the owner. The result of exit planning is making the business as valuable as possible, with a focus on the owner’s personal and financial goals, until the business owner decides to exit. Unlike business succession planning, exit planning does not begin with a buyer in mind nor does it limit the transition of the business to an insider. Exit planning does not set a time for when the business is transferred or sold. This gives the owner the flexibility of exiting on their terms and their timeline.
A successful transition, or succession, can only occur if the business owner has something to look forward to after they transfer the business. If the next life stage is unknown, the business owner will become frustrated with this newfound freedom. Why do you think so many business owners simply slow down without ever exiting, or re-enter the workforce after they have exited their role as owner of a company? It is because they do not have something that brings them the fulfillment that working on their business once did. An important part of exit planning is helping the owner determine what their next life stage will be – that personal mission.
A successful transition, or succession, can only occur if the business owner feels financially secure after they sell their business. How does the owner know if the sale of the business will produce enough financial resources to satisfy their financial needs? The business owner needs to perform a financial assessment to determine their personal financial goals. After they know what their financial needs will be, the business owner, after considering non-business assets, will determine how much the business value needs to be at the time of sale. If you have only considered insiders as your potential buyers, and it is known that selling to an insider does not produce the highest business value, will you (the owner) feel financially secure after you transition out of the business? Exit planning helps the business owner determine the financial gap and improve the business value through improving their business strategies.
I have a client that started their business succession plan without knowing what they will do in 3 - 5 years when they are fully divested of their business interest. They are stressing to find that personal mission before they exit. I have another client that knows they want to be in Florida fishing and golfing. They have plans to sell the business to a third party and are looking forward to exiting the business. The difference between these clients is the latter considered their personal end game and the former focused solely on exiting the business.
If you are a business owner considering business succession plan, stop and ask yourself:
- What will be my personal mission?
- How much will I need to accomplish my personal mission?
- Are insiders the best choice for a successful transition to accomplish my personal and financial goals?
- What is my business value and can it satisfy my financial goals?
Exit planning is not done in isolation by your attorney, CPA or financial advisor. You need a business advisor that can help you define and accomplish your personal goals and objectives. Someone who will collaborate with your other advisors to make sure those goals and objectives are met. If your business succession plan only involves your attorney, CPA or financial advisor without a collective vision or guiding force your plan to exit is most likely incomplete.
David M. Bastiaans is an attorney with Wolcott Rivers Gates in Virginia Beach, Virginia. Before becoming an attorney, David practiced as an accountant with certified public accounting firms in Westboro, Massachusetts and Washington, DC and still maintains his CPA license. David earned his LL.M. in Business Transaction from The University of Alabama School of Law. David uses his skills and advanced training in assisting business owners with business planning, succession planning and estate planning. More information about David and his practice can be found here or you can see other blog articles here. David can be reached at his office at 757-554-0242 in Virginia Beach, Virginia. If you are not planning, you are reacting!
LinkedIn | Facebook | Avvo