Business Valuations Blog

Business Transition Planning: How to Navigate the Challenges of Exit Planning

Nearly 90% of owners of family-run businesses believe that the same family (or families) will control the business in five years.  Unfortunately, if history provides any indication, only about two-thirds of those businesses will survive to the second generation.  The statistics deteriorate when it comes to the third and fourth generations, with only 5% of family-owned businesses surviving to the fourth generation.  These statistics illustrate a key challenge that today’s business owner faces: how can I properly execute an exit plan?  Here are a few tips that will help you navigate the challenging and complex world of succession planning:

1. Start Now: Because succession can involve family considerations, strategic business concerns, personal financial issues, and countless other obstacles, it is not a process that should be executed without proper planning.  Further, the current tax law offers incentives to transfer wealth, offering an added bonus to those who can move quickly, but responsibly, in executing business succession.

2. Develop a Plan: Once you have determined you are ready to embrace succession, the next step is to identify your objectives.  What are the two or three things that you want to ensure will result from your plan?  This may include the maximization of your personal financial position.  Maybe it involves a short-term goal of enhancing the value of your business by expanding your products or services, cutting costs, or other mechanisms that can maximize the value of your investment.  Your business advisor, whether a certified public accountant or a business valuation professional, can offer you ways to address these tasks.

Alternatively, you may want to ensure that the second generation is placed in the best position possible to succeed.  You may need to invest in training for the next generation in order to ensure they are suited to run your business effectively.  You may also consider gifting the business to the next generation instead of saddling them with the financial challenges of funding a purchase of the company.  There are countless other objectives that we have seen throughout the years – everyone has unique goals that they are looking to achieve.  One thing is consistent, however – the identification of the objectives of an exit plan is paramount to its success.  Be specific with your goals and make sure that they are realistic.

In addition to pinpointing your objectives, be sure to consider your readiness to leave the business from a financial and mental perspective.  From a financial perspective, review your personal financial situation, retirement plan, and estate plan as you develop your objectives.  When it comes to the mental considerations, determine how ready you are to leave your life’s work in someone else’s hands.  Also, remember that upon exit, you will have a lot more time on your hands – what are you going to do with it? 

3. Pick Your Team: As you would expect for a project that involves your life’s work, this is not something you want to undertake entirely on your own.  You should consider consulting with most, if not all, of the following types of practitioners: certified public accountant, business appraiser, personal financial planner, M&A attorney, tax attorney, and insurance advisor.  In order to execute your plan efficiently, we recommend that you appoint one of these individuals as the quarterback of your team.  This person’s responsibility is to drive the process forward and ensure all your other team members are on the same page as you work your way towards the exit event.

4. Weigh Your Options: Do not make any rash decisions as you work through your plan.  There are numerous techniques and vehicles that are available to you to meet your objectives.  Use your exit planning team to identify alternatives and related consequences of the various exit planning options, such as gifting, liquidation, third-party sale, sale to family members, sale to employees (ESOP), etc.  More than anything, be sure that you revisit your goals regularly and understand how they are linked to the option(s) you have selected. 

5. Execute: As is the case with any business plan, a succession plan cannot succeed without persistent effort to execute.  In any succession plan, you will have a series of tasks that must be completed.  Depending on your selected exit option(s), you may need to complete legal documentation, deal structuring, financial due diligence, valuation of the business, tax compliance, etc.  Define small goals with deadlines and give them to your quarterback.  Follow up with your quarterback and hold him/her accountable.

Do you need help setting up your exit plan? Post a comment below or contact our Business Transition Planning Group at 440-449-6800.


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