Succession Planning 101: What Is Your Exit Plan?

“What is your exit plan?”

Business owners should start asking themselves this question on the day they open their doors. But they don’t. There are many reasons for this, beginning with the hope that the business will never fail. Even in the rare businesses that do last, however, there inevitably comes a day when the owner wants to leave the business. Preparing for that day is the key to a smooth transition.

Entrepreneurial businesses often follow this trajectory: When the business opens, the entrepreneur-owner does everything from sales to bookkeeping. As the business grows, the owner gradually delegates various tasks to trusted advisers, employees and contractors. Then the day arrives when the owner realizes that he or she is ready to try something else or retire.

That day is not the day to begin thinking about an exit strategy. Ideally, there will be at least seven years between the time when the owner recognizes the need for a plan and the day when the business finally transitions to its new owners. If there are only three years, the plan is considered a short-track one. Any plan shorter than that leads to a frantic hunt for a buyer, possibly resulting in less-than-optimal terms.

Here is a three-step checklist that will help avoid the latter result. Note that this checklist assumes a single owner.

  1. Day one:
    1. Establish the business’s vision, goals and objectives.
    2. Determine the anticipated level of family involvement, if any.
    3. Understand each family member’s goals.
    4. Develop the outline of a retirement plan, including your ideal age of retirement, desired cash flow and anything else you think is important.
    5. Establish a team of trusted advisers, including accountants, attorneys and mentors.
  2. Between seven years and three years before your planned retirement:
    1. Meet with family to discuss the plan and determine whether any family members are interested in, and capable of, taking over the business.
    2. If no family members are interested, create a realistic exit strategy.
    3. Identify potential problem areas.
    4. Evaluate whether any key staff should be offered an ownership interest.
    5. Decide whether you will have an ongoing role in the business after retirement, what that will be and how long it will continue.
    6. If the transition will be to another family member, identify an outside facilitator to help guide the process. Put a training program in place and begin transitioning primary responsibility for customers or clients.
    7. If the transition will be to an outside party, identify a business broker who will help the process move forward. Meet with advisers to ensure the business is in the best shape to attract a buyer. Put in place any changes necessary to make the business more attractive.
    8. Meet with advisers to determine how the business will be transferred: whether it will be an outright purchase, a gift or bequest, or some combination. Review tax strategies and the legal implications of each option.
    9. Document the plan in writing.
    10. Obtain an appraisal to determine the fair market value of the business and its associated real estate.
  3. Review your estate plan to consider the potential tax implications of a sale or transfer of ownership on the owner, the owner’s spouse or partner, and succeeding generations

Reach out to Roz Carothers and her team at Triplett & Carothers to learn more.