Exit and Succession Planning

Exit Planning

Succession Planning is a "business-centric" process that is primarily focused on the transfer of ownership of the business to the next owner(s) in a manner that assures the continuity of leadership and management of the business following the transfer and helps to assure the survival and continued success of the business following the transfer. An effective succession plan will help to assure that business continue to run smoothly after the business’s current owner(s) move on to new opportunities, retire or pass away.

As the above definition suggests, succession planning is an integral part of the exit planning process although the primary focus of succession planning is on business survival and future business success rather than on the future psychological, emotional and financial needs and objectives of the former owner. However, the factors and steps that may need to be taken to help assure such survival and future success of the business are also critically important to the success of the exit plan because (1) such survival and future success is an aspiration component of a successful exit plan and (2) to the extent the business or its value must be relied upon to meet the owner’s and family’s financial security needs following the transfer, the success or failure of the succession plan will have a direct impact on the success or failure of the exit plan.

Succession Planning

“For the business owner, the ultimate expression of success is to create both a business and personal legacy that lives beyond you. There can be no success without a successful succession.”

The exit planning process typically involves the following steps:
(a) Help the owner understand and accept the inevitability of ownership succession and why planning well in advance of the ownership transfer event is so important in achieving a successful exit both for the owner and the business.
(b) Determine the current owner’s exit objectives
             - targeted departure date
             - the identity of the preferred future owner(s)
             - the preferred method to transition ownership
             - the owner’s expected role in the business once the transition of ownership has been completed
(c) Determine the amount of annual income/cash flow that the owner will require to provide for the post-transfer financial security of the owner and family and to meet any other financial objectives following the transfer of ownership.
(d) Estimate the financial capital that will be required to provide this projected annual income/cash flow taking into consideration expected future income sources (e.g., social security, pensions, non-qualified deferred compensation, etc.)
(e) Project the amount of financial capital expected to be provided from existing non-business investments and other financial sources.
(f) Determine how much the business will need to provide to make up the expected shortfall between what is projected to be available from existing investments and other financial sources and what will be needed to meet the financial security and other financial objectives of the owner and family following the ownership transfer.
(g) Determine how this shortfall, if any, can best be satisfied taking into consideration the owner’s investment objectives as stated above.
            - rely on proceeds from the sale of the business
            - rely on post-transfer payments from the business to the former owner
            - extract cash from the business prior to transfer of ownership
            - other methods
(h) Estimate business value based on how the business is currently managed and operates.
(i) Compare this estimate of business value to the shortfall, if any, determined in (g) above.
(j) As necessary, undertake a program to grow and maximize business value and reduced business risk.
Exit planning is a formal process that is undertaken by the business owner, typically in conjunction with a team of financial and professional advisors, to prepare for the eventual transfer of business ownership to a selected successor owner (or ownership group) in a manner that (1) provides the best assurance of survival and future success of the business following the transfer, and (2) provides the owner and family with an adequate level of financial resources to maintain lifestyle and achieve other objectives and aspirations once the transfer of ownership is complete.