Succession and exit planning are crucial for business owners who want to ensure a smooth transition and maximize the value of their business. A well-structured plan requires careful consideration of the business, goals and the financial requirements for retirement.
Having worked with over 1,000 business owners in the last fifteen years and seen the difference for those who have planned and acted early, I am encouraging others to do the same.
21-Step Business Succession And Exit Planning Process
My team and I collaborated to develop a 21-step process designed to identify, protect, maximize, extract and manage business value.
These 21 steps are further grouped into five stages of value:
- Identifying value (where are we starting from and what are the gaps),
- Protecting value (how do we protect the value already created),
- Maximizing value (how do we accelerate value),
- Extracting value (the transaction or liquidity event), and
- Managing value (life after business and funding your retirement).
Toward fulfilling the first step, it is almost impossible to find the best approach and the ideal pathway without first finding out exactly where you are starting from. What is your business worth today? What could it or should it be worth? What are the gaps that need to be addressed to maximize business value and achieve a successful exit?
Business Valuation And Insights
To start answering these questions, here are some factors to consider when conducting a business valuation:
1. Understand the current state of your business. A thorough business valuation helps identify the strengths, weaknesses, opportunities and threats (SWOT analysis) that your business faces.
2. Identify risks and opportunities. By identifying these factors early, you can develop strategies to mitigate risks and capitalize on opportunities.
3. Benchmark against industry standards. This comparison helps identify areas where your business is performing well and areas that need improvement. It also provides a realistic view of the business’s market position.
4. Strategically plan and maximize value. Your plan can also include initiatives to improve operational efficiency, expand market reach or enhance product offerings.
By starting with a business insights report and valuation, business owners can lay a strong foundation for strategic planning, risk management and value maximization.
Employee Ownership And Management Succession
I think one of the most important factors of a clear and actionable strategic plan is to ensure it aligns with your long-term goals; this allows your business to continue to grow while you, the owner, can gradually withdraw.
Toward this, make sure to foster an ownership mindset among employees. A clear management succession plan is also critical. Lastly, I recommend employee share ownership plans (ESOPs) to help reduce owner dependence and ensure business continuity.
For a more detailed explanation of the benefits of employee ownership as a strategic advantage, see a previous article I wrote on this topic.
Tax Planning And Documentation
A comprehensive tax strategy and accurate, up-to-date documentation can help avoid potential disruptions and legal challenges during the process. Here are three key factors in assessing tax planning and preparing sale documentation:
1. Comprehensive tax strategy.
2. Accurate and up-to-date documentation.
3. Ensuring legal compliance.
Ongoing Investment And Asset Protection
Once you get to the final stage and start focusing on your actual exit, it is then time to look into ongoing investment planning and asset protection. Here are four key deliverables for owners to manage after an exit:
1. Comprehensive investment plan. You want to have a detailed investment plan that outlines the strategies for ongoing investments, including asset allocation, risk management and expected returns.
2. Asset protection strategy. A robust asset protection strategy helps safeguard the business and owners’ assets. This includes measures to protect against risks such as legal challenges, market fluctuations and other uncertainties.
3. Estate planning: A well-structured estate plan that addresses the distribution of the owner’s assets according to their wishes. This includes setting up trusts, wills and other legal instruments to ensure the business’s value is preserved for future generations.
4. Regular reviews and updates. Regular reviews and updates of the investment and estate plans ensure they remain aligned with the owner’s goals and the business’s evolving needs. This includes periodic assessments of the business’s financial performance, market conditions and other relevant factors.
Planning that Pays Off
Typically, it can take years to work through the 21 steps, but once accomplished, it is not unusual to see value increase significantly. In fact, I have seen businesses originally valued at $4 million sell for upwards of $5.6 million when their leaders have appropriately set up exit strategies. With more time dedicated to this model, you can strengthen your position even further, and my longer-term clients have an average of 32% year-on-year growth by working through these steps.
By following these key focus areas, business owners can more effectively increase the value of their business and achieve a successful exit.
As this article was written for Forbes Business Council with the primary audience being business owners themselves, advisors in this space know how critical it is for owners to have the guidance and support to be sure these key areas are executed. While planning a business exit can often be daunting for owners, advisors equipped with the right set of tools can help them prepare for a smooth transition and realize their maximum business value.
For more recent Forbes Business Council articles from Craig, follow the links below:
For advisors looking to help owners in the key areas of improving business value, we’d love to show you where Capitaliz comes into play. Book some time with us to learn more.
