The decision to step away from their company is one of the biggest decisions a business owner will make. Whether retiring, selling, passing the business to the next generation, or closing the business, planning for this transition is crucial to the future of all the business’ stakeholders. Two related terms often arise during this process: exit planning and succession planning. Too often these terms are used loosely by professionals … sometimes inaccurately. While exit planning and succession planning are related, they serve different purposes and involve different strategies.
In this article, I outline the objectives of exit planning and succession planning, and their key components, followed by how these two planning exercises differ and complement each other.
What is Exit Planning?
Exit planning is a comprehensive strategy designed to help business owners leave their business in a way that maximizes value to the business owner, based on their personal, financial, and professional goals. Exit planning is broader in scope than succession planning because it focuses not only on the business but also on the owner’s personal and financial well-being in retirement.
Key Components of Exit Planning
The key components of exit planning include business valuation, financial planning, selecting the best exit option, contingency planning, and timeline development.
Business Valuation helps the business owner understand the company’s worth, to ensure a fair sale or transfer price, in addition to how much money a business owner will have to fund his or her retirement.
Financial Planning helps the business owner ensure his or her financial security post-exit and includes estate planning, investment planning, insurance planning, and tax minimization strategies.
Transition Options: Business exit advisors educate an owner to select the best exit options, such as selling to an external buyer, transferring the business to a family member, engaging a private equity group or M&A firm, creating an ESOP, or merging with a strategic buyer.
Contingency Planning: helps a business owner prepare for unforeseen circumstances, such as illness or death, which might force an early exit.
Timeline Development: Business exit advisors, like Certified Business Exit Consultants (CBEC®,) collaborate with the business owner to establish a clear timeline and process for the transition.
So, the main focus of exit planning is on the business owner’s endgame and involves the help of several different professionals, like an exit planning advisor, financial advisors, insurance agents, CPAs, attorneys, business consultants, realtors, and business brokers.
What is Succession Planning?
Succession planning, on the other hand, focuses on identifying and preparing the next generation of leadership for the business. It ensures the company continues to operate smoothly when key leaders leave or retire and is a more focused approach than exit planning in that it only deals with one issue – leadership continuity.
Key Components of Succession Planning
Identifying Successors: Succession planning advisors help businesses select individuals within or outside the organization to take over key roles.
Leadership Development: Succession planning advisors help train and mentor potential successors to equip them with the skills needed to lead effectively.
Role Clarity: Succession planning advisors help define roles, responsibilities, and expectations for successors.
Knowledge Transfer: Succession planning advisors document and share critical business knowledge to ensure a seamless transition.
Cultural Continuity: Succession Preserving the company’s values and mission during the leadership transition.
Succession planning ensures business continuity and operational stability regardless of the owner’s involvement.
Key Differences Between Exit Planning and Succession Planning
The ways succession planning differs from exit planning can be summarized in the focus, scope, timeline, objective, and the oversight of the key participants changing roles during the business owner’s transition.
Primary Focus: The primary focus in exit planning is on the owner’s exit and financial security, while the primary focus of succession planning is on the continuity of business leadership.
Scope: The scope of exit planning includes the business and owner’s personal goals, whereas the scope of succession planning centers on the leader’s transition.
Timeline: Exit planning is often tied to the owner’s desired exit date. By contrast, succession planning can be ongoing and continue after the business owner has exited the business.
Objective: The objective of exit planning is often on maximizing the business value at the point of the sale or leadership transition, while the objective of succession planning is to ensure a smooth leadership transition when the owner leaves the business.
Key Participants: The key participants during the exit planning process are the business owner, CPA, attorney, different business advisors, and real estate and business brokers. The key participants during the succession planning process are the current leadership and their potential successors.
How Exit Planning and Succession Planning Complement Each Other
Exit planning and succession planning are distinct processes, but they often overlap and should be integrated for optimal results. A well-thought-out exit strategy includes a strong succession plan to ensure the business remains stable and valuable during and after the owner’s transition.
When there is exit planning without succession planning, the business might be sold for a high price, but operational disruptions could reduce its value over time. When there is succession planning without exit planning the leadership transition may be smooth, but the owner’s financial and personal goals could be neglected. However, when combined, these plans ensure both the owner’s goals and the business’s long-term success are achieved.
In conclusion, exit planning and succession planning are both critical for business owners who want to leave their companies responsibly. While exit planning is focused on the owner’s departure, succession planning ensures the continuity of leadership and operations. By understanding the differences between exit planning and succession planning and integrating them effectively, business owners can secure their legacy and the future of their business.
Whether you are starting to consider your exit or preparing for leadership transitions, seeking professional advice, and beginning the planning process early are essential steps toward a successful outcome.
