A recent survey on transition plans for privately held businesses, completed by PricewaterhouseCoopers, revealed that only 22% of business owners or management teams have “done a great deal of planning”, while 69% have done some planning to virtually no planning for the eventual transition of their company.  At some point in time every business owner will exit their business, which, in most cases, represents a significant component of family wealth.  Taking a proactive approach to maximize this value and convert what is possibly the largest and most illiquid asset into cash is the goal behind the exit planning process.  Whether the company is sold to a company insider or an outside 3^rd party or transferred through an orderly succession to a close member of the family, the need for a strategic exit plan is imperative for any owner of a business.  Whether the goal is to exit the business in six months or ten years, it is critical that a business owner recognize that exit planning is probably the single most important mechanism to take control of the terms and conditions of exiting their business.  The goal of this article is to highlight the exit/succession planning process and to review the importance that these plans have for every business owner. 

What is a Succession Plan?

A succession plan is a written road map that is implemented over a period of time that is designed to maximize the value an owner receives when exiting the business. How can the business be transitioned to a family member or key employee to mitigate the taxes involved?  If an offer was received today to purchase the business, what is the basis to determine the valuation of the company and the fairness of the offer?    Proper succession planning will reduce the variability of the business ownership and control transfer, and will secure a solid financial future for owner.  Succession planning, also commonly referred to as “Exit Planning,” is a methodology that addresses three critical questions a business owner will face at some point in time:

1.    How much income is needed from the business transition/sale for retirement?

2.    What is the timetable the owner seeks to exit the business?

3.    Who will succeed the owner when the business is transitioned or sold?

A properly prepared succession plan will be developed in conjunction with legal, accounting, and financial professionals.  Depending upon the size and scope of the business, succession planning can be a fairly complex process which could take several years to properly implement. Fortunately, the process can be broken down into individual deliverables and segments whereby value can be recognized at an early stage.  A professional team will bring tremendous efficiency to the process by developing the basic structure for the steps to be followed ensuring that the endeavor will be a financially rewarding and a personally gratifying experience for the business owner.  An exit plan is fairly easy to initiate can be started at a minimal cost. 

The critical steps involved in developing a succession plan include:

1.    Establishing Exit Objectives

·         Determining the retirement timetable, long term income needs, and financial requirements necessary to reach them.

2.    Identify the key drivers of business value

·         What is the fair market value of the business if it were sold today?

3.    Plan to build & preserve business value and reduce risks

·         Activities that can be implemented to leverage best practices and maximize the business value.

4.    Transfer of ownership, management, & control

·         Determine the anticipated buyer (outside 3^rd party, key employee, family member) and develop the structure for ownership transfer that maximizes financial security while minimizing taxes. 

5.    Contingency Planning

·         Protect the continuity of business operations should an unexpected event occur.

6.    Wealth management/preservation

·         Secure financial independence by developing a financial plan to manage the income from the business sale. 

7.    Successful Exit

An experienced business intermediary firm will be able to streamline the succession planning process by taking the lead in the planning framework and consulting the required resources (wealth management, law, and accounting) over time as they are needed. This team concept is extremely effective for the company owner as they are only paying for the required services at the time of use.  A business owner is now able to commence the plan and establish the basic structure for the exit plan at reasonable cost. By establishing the current fair market value (FMV) of the business in conjunction with a determination of the owner’s income needs for retirement and their anticipated exit time table, the Business Intermediary will have the critical elements necessary to build the framework of the succession plan.

Implementation of a succession plan should be viewed as a process versus a one-time event and those plans that are initiated years in advance of the anticipated business transition are the most successful. The more time that a company owner has allocated to implement the succession plan, the greater the opportunities will be to maximize the business value, minimize tax liabilities, avoid key employee turnover, and eliminate emotionally charged family issues.

Michael Fekkes is a Senior Broker at Enlign Business Brokers in Nashville, TN.  Michael is a Certified Business Intermediary CBI®, a member of the International Business Brokers Association IBBA®, as well as a former business owner.  He can be reached at 615.535.1150 or mfekkes@enlign.com.  Enlign Business Brokers (www.enlign.com) is a Professional Services Firm serving the Southeast that is headquartered in Raleigh, NC with regional offices in Nashville, TN and Atlanta, GA. providing business intermediary services ranging from valuation and sale to exit & succession planning strategies.