Exit and succession planning

By Lee Rossini

In last week’s article, I discussed business continuity planning. The nature of this planning differs from exit or succession planning in that it deals with emergency or crisis situations whereas the exit or succession of an owner or key person can be properly planned for in advance. However, even though financial advisers are great at advising their clients on the importance of planning for retirement, they seldom follow their own advice when it comes to planning their exit from the business.

Few advisers actively plan their departure from the business, with many believing that there will be a purchaser ‘out there’ willing to purchase their business ‘for a lot of money’. On the contrary, a successful exit or succession plan requires a multifaceted approach that is carefully managed in order to minimize the negative impact on employees, the value of the business and especially on clients.

You may well be asking what the difference is between exit and succession planning. Although there is a crossover between an exit strategy and a succession plan, they are in fact different strategies.  Succession planning refers to identifying, training and transferring of leadership to a particular person or team of people while retaining an ownership stake in the business. On the other hand, exit planning refers to identifying and executing a strategy of transferring the ownership (the sale) of the business to another person, team or external entity. 

Characteristics on exit planning:

• There should be a focus on creating equity in the business thereby enabling a higher sale price.
• Proper planning enables you to determine when and how you will leave the business.
• A tax efficient structure should be implemented.
• Appropriate estate planning should be carried out to protect the assets and transfer of wealth by attracting a minimum amount of estate duty and other taxes.
• Staff, product suppliers and clients can be forewarned, and good communication during the process will ensure they are comfortable with the sale and their relationship with the business in the future.
• Proper planning, carried out with foresight of the future, will give you more control over the mechanics of the sale and will ensure that the business is ‘sale-ready’ when the time is right.

Characteristics of succession planning:

• It provides an opportunity to build up a self-sustaining business that can operate without you at the helm. This gives you the freedom to hand over the business at any stage.
• The business will generate cash flow for your retirement.
• Empowering up and coming future leaders to take over will bring fresh and new ideas into the business. The objective of this strategy is to align the business with external trends to ensure long-term sustainability.
• The business remains an asset in your estate.  It can be sold later, transferred to a family member once they are able to run the business or it can be sold or bequeathed to a family member at the time of your death.
• There is less disruption and more continuity for staff and clients.

Exit planning means relinquishing your role and responsibility in the business entirely whereas succession planning means that you still retain some control by virtue of your ownership in business. Before planning takes place, it is necessary to decide which route suits you best personally and is also most appropriate for the business. Irrespective of whether you decide to exit the business altogether or to hand over the reins whilst still maintaining some form of ownership, early planning is key to a successful move away from the business.