An exit strategy helps business owners ensure the long-term success of their company.
A good succession plan creates a blueprint for ownership transfer as you exit your business. It helps you prepare for your retirement, ensuring you have the income you need. And setting a well-conceived plan into motion protects the people around you, including your heirs, employees, and customers by laying the groundwork for a smooth transition.
Yet, despite these important benefits, many privately owned businesses don’t have a succession plan, leaving the business vulnerable to unforeseen circumstances. For instance, if the business owner dies or becomes incapacitated, there may be no one to step in and lead the company as it regains its footing.
Planning early can head off any issues and produce other benefits, including having the time to retain key employees and mitigating tax burdens triggered by a sale.
Making a plan
As a first step to creating a succession plan, assemble a team of experts. Work with a lawyer, accountant, and financial advisers who can help you make any necessary changes to your business’s legal structure and ensure the proper paperwork is in place.
Get an appraisal from a third party to determine the value of your business. An appraisal can help you set sale prices or set prices for ownership shares. If your valuation comes back lower than you expected, work to increase the value of your business before it’s time to sell.
Next, think about what kind of relationship you want with the business after you exit. Do you want to maintain an interest in the company? Do you want to stay on the payroll as a consultant? Would you rather cut all ties and never think about it again? Knowing where you want to land will guide your exit plan.
Create manuals for management and employees that allow your successor to jump in and get acclimated relatively quickly. Be sure there are employees who can take over your responsibilities and that there are no tasks only you know how to do.
Choosing a successor
Once you know the role you want to play, it’s time to choose a successor. Broadly, your options are:
- Heirs: Transferring ownership to another family member is a popular choice. Whether it’s your spouse, child, or someone else, think objectively about their abilities. Do they have the skills necessary to run the business and the desire to take over?
- Business partner: If you want to sell your interest in the business to your partner or partners, set up a buy-sell agreement. A buy-sell agreement specifies when an owner can sell their interest, to whom they can sell, and for how much.
- Employees: Selling to someone in management at the company can be a good way to ensure continuity in succession. Managers tend to have a good understanding of operations required to keep the business running smoothly. Transferring ownership to a group of employees is an option as well. An employee stock ownership plan (ESOP) can help. An ESOP is essentially a trust into which employees can put funds that convert to ownership shares later. Allowing employees an interest in the company’s future may encourage them to do whatever they can now to help the business succeed.
- Third party. If your heirs or employees are not interested in taking over your business, you can sell to an outside buyer. Plan for this possibility well in advance, as this option can take a lot of time and effort as you search for a buyer and negotiate the terms of a sale. Newcomers may ask you to stay on with the company as a consultant for a short time to smooth the transition.
Updating your plan regularly
A succession plan is only useful if it’s up-to-date. Set a regular schedule for reviewing your plan. As things change—say your chosen successor is no longer an option—update your succession plan accordingly. It can be the difference between the business succeeding under a new generation of leadership or ending with you.