By Elizabeth Schanou, JD, CExPTM , Senior Wealth Planner
Succession planning – or more accurately “business exit planning” – is a critical process that has weighty implications for small business owners. There are two key goals: You want to ensure a seamless transition that will preserve the legacy you have worked so tirelessly to build, and you also need the sale to achieve sufficient income for you to have the independence you crave in retirement.
Most owners are so involved in the day-to-day details of running their business that it’s challenging to carve out the time to consider their eventual exit. However, the best outcomes are achieved when small business owners make exit planning a priority in their ongoing strategy. Here are some business exit planning mistakes I see, along with proactive measures small business owners can take.
Exit Planning Mistake 1: Not Starting Soon Enough
It’s hard to believe, but the day you start your business is the day you should begin planning your exit. That’s not to say you won’t be inspired and engaged as an owner. But those who build their business with the intention of creating the most value will be the most satisfied when it’s time to sell.
Starting early means you’ll devote planning time in smaller, more manageable increments. Owners who have a longer time horizon can address smaller issues that will strengthen the business over time so it’s as attractive as possible to a third party when it is the right time for an exit. Your financial advisor is a resource to point you in the right direction. They can even connect you with sources to provide counsel as you navigate the process.
Exit Planning Mistake 2: Failing to Conduct a Regular Business Valuation
Even when done informally, a business valuation can provide an impartial perspective that will dispel unrealistic expectations of a business’s worth. Many owners are surprised to discover some of the factors that have an outsized effect — for example, a business value suffers if the operation is too dependent on one customer or one person (i.e., you!).
Once you have a rough idea of the business’s current value, you can identify any “gap,” which refers to the amount the business owner needs to walk away with to live the life they envision. Then you can implement the most relevant levers to grow the value and close the gap.
Exit Planning Mistake 3: Not Looking at Your Plan Holistically
While some business owners think of their exit in terms of “succession,” comprehensive exit planning involves much more than the actual ownership transfer. It should also focus on how the sale will bolster your personal financial stability as well as what it means for the future of the business. For example, you may want assurance that long-standing employees will remain in the business.
Talking with an advisor about your personal financial plan can help determine the amount you need to realize from the sale — and what steps can be taken to build the business’ value along the way.
You should also consider how long you intend to stay and develop a plan for how you will segue out. You don’t have to circle a date on the calendar, but it’s helpful to have a general time frame while realizing it may fluctuate.
Exit Planning Mistake 4: Neglecting to Create a Favored Hand-Off Strategy
Once you start the process to sell your company, it’s liable to progress much faster than you had expected. That’s why it’s wise to have already thought through who the successor might be if you’re hoping for an internal transfer, such as one of your children, another family member, a fellow owner or a reliable employee.
The earlier your successor is identified, the longer you have to help them develop their leadership skills and knowledge. A sustainable business is one that will operate well without your consistent presence. To ensure the business will survive and thrive when you’re gone, you need to take a step back from the day-to-day operations and train others to carry it on.
If you don’t see a viable successor, you may opt to sell to a third party. Take the time to identify what your ideal buyer looks like, articulating your vision so you can seek alignment, before you get a business broker involved.
Exit Planning Mistake 5: Not Seeking External Expertise
Your team will make or break your business exit, so you’ll want to assemble a well-rounded cohort early. First, identify one person on the team who will serve as the “quarterback.” Often, that’s your financial advisor. While experience should be the top criteria you look for, there are also designations — such as Certified Exit Planning Advisor (CEPA) or Certified Exit Planner (CExPTM) — which underscore their commitment to helping owners with business exits. Your advisor is also a resource to help find specialized professionals you might not know, such as a business broker.
Other key players include an attorney, an insurance professional and often a retirement plan specialist who can identify the incentives that will keep current employees committed or help you organize an employee stock ownership plan (ESOP). And don’t overlook the importance of your CPA to mitigate tax consequences from the transfer itself or gift taxes to family members. After all, the most critical financial factor is not how much you sold the business for, but how much you walk away with.
Starting Now Can Lead to a Smoother Exit Later
While the path to successful succession can be riddled with potential challenges and missteps, knowing what to expect and having an ally throughout the process allows small business owners to sidestep these common errors and navigate a business exit with confidence.
This communication is designed to provide accurate and authoritative information on the subjects covered. It is not however, intended to provide specific legal, tax, or other professional advice. For specific professional assistance, the services of an appropriate professional should be sought.
