According to CFIB’s 2023 report, over 76% of small business owners are planning to exit their business in the next decade. This means a transfer of ownership of over $2 trillion in business assets in the next ten years.
So, how do you make sure you’re in control of when and for how much you sell your business?
As the market becomes crowded with owners ready to sell, the advantage will go to those who have done their due diligence, considered all the options, and planned for the unexpected contingencies.
To ensure business continuity and proper valuation, strategic planning is crucial. Most of the business owners we meet are unsure whether they should create a Succession Plan or an Exit Plan. Aren’t they the same thing?
The answer is simple: although they’re related, they are not the same.
While succession planning involves a transfer of leadership functions, exit planning can mean transitioning ownership to either family members, key employees, or a sale to a non-related third party.
Let’s get into more details…
What is Succession Planning?
Succession planning focuses solely on transferring leadership from one generation to the next. It’s a structured approach to ensure a smooth transition when key persons, such as business leaders or owners, leave their positions.
A well-established succession plan helps with the following:
Business Continuity
Succession planning helps identify key individuals who can be trained and mentored to someday take over when existing leaders exit the business. This seamless transfer of leadership and responsibilities helps minimize the disruptions that may arise from the transition.
Talent Development
Succession management planning provides a framework for identifying and grooming potential leaders within the organization. This encourages employee growth and development and boosts morale as employees see a path for career advancement.
Knowledge Transfer
Having a succession plan in place allows experienced leaders to pass on their knowledge and expertise. This is critical in maintaining institutional insights and key competencies within the organization.
Risk Mitigation
Lastly, succession planning helps organizations mitigate the risks associated with leadership transitions. By identifying and preparing successors in advance, organizations reduce the chances of making rushed or poor choices should unforeseen events arise.
What About Exit Planning?
Business exit planning incorporates succession planning with strategies for building transferable value, reducing tax liability, preparing for unexpected contingencies, minimizing family stresses, and increasing the likelihood of a successful business transfer.
Exit plans incorporate the personal and financial goals of the business owner, their spouse, and their children.
Having an exit plan is important for the following reasons:
Smooth Transition
A well-executed exit plan allows for a smooth transition of ownership and management. Whether you’re selling to a third party or passing it on to family members, careful planning minimizes disruptions and maintains business continuity.
Value Optimization
Exit planning helps ensure that you receive the best possible return on your investment when you sell your business. This means building value by investing in new equipment, improving processes, increasing revenues, or expanding operations. Having an exit plan ensures you’re not leaving money on the table.
Strategic Tax Planning
Exit planning strategies can help you minimize tax liabilities. Proper structuring of the exit can help preserve more of your wealth by reducing capital gains tax, income tax, and estate taxes.
Legacy Preservation
For family-owned businesses, exit planning can help preserve the family legacy and ensure that the business continues to thrive under new leadership.
Peace of Mind
Having an exit plan reduces uncertainty, establishes financial security, and allows you to plan the next phase of your life without worries.
60% of business owners have yet to discuss exit planning with their family or business partners. Selling a business is easier, less stressful, and potentially more profitable when you are selling on your own terms and timelines – not someone else’s.
So, whether the business is small or large, family-owned or not, astute business owners always need both succession and exit plans.
While they’re different, they share an important characteristic – neither should wait. With the proper plans in place, you can make better long-term decisions.
Download our free succession planning checklist or reach out to us to talk about your current situation. We’re here to help!