Planning for Retirement
When a Central Figure Leaves
In running your business there is only one guarantee: you eventually will exit—either voluntarily or involuntarily. The day will come when you will have to say goodbye.
Exiting is not an easy process, and the odds are not in your favor. Therefore, in order to succeed, the business and the owner must both be prepared to successfully transfer the business.
This article will address the common confusion found in differentiating a business exit from a business succession. Both are needed to successfully exit your business, unlock your trapped wealth, protect your legacy and successfully move your company into the next generation or to an external buyer.
My experience has reaffirmed that a business owner cannot commit to the difficult emotional succession process (replacing themselves) until they can clearly envision their financial future (exit plan and retirement) and accept the reality that they will not outlive their money.
An exit plan is a necessary tool that will assist the business owner in controlling and visualizing the process of transferring and monetizing their business while getting a better understanding for the financial aspects of the transaction. Since approximately 70 percent of a business owner’s wealth is trapped inside their illiquid business, this should become a top priority.
This is a risky process. Several studies have concluded that fewer than 30 percent of businesses will actually transfer or sell to employees, managers, or family, ending in liquidation, or 10 percent of the business value, for the owner. Further, when selling to an outsider, fewer than 20 percent of the companies that are brought to market actually close.
This is a sad statistic since most owners fumble the ball in the red zone of their career, leaving a sad legacy for the company, employees, family, spouse and community.
In the simplest terms:
- An exit plan focuses on monetizing the business’ trapped illiquid wealth without being clobbered by taxes and without running out of money in retirement.
- A succession plan focuses on the company successfully performing without the present owner by moving management into leadership, ownership and eventually the empty CEO’s chair.
An exit plan provides a customized written plan that monetizes the business, meets the owner’s personal and financial goals, protects their wealth and moves the owner into their next stage of life.
A succession plan provides a customized written plan that focuses on the human side of the business. Succession replaces the owner by moving the chosen performers to a professional level of management: into leadership, ownership and the position of CEO. This requires time, training, facing blind spots and stretching the team.
An exit plan helps secure the owner’s business wealth and sets the stage to move into succession. The plan establishes and controls the process of who, what, when, and how to control this course of action while protecting your wealth.
The exit can be complex and taxing on a financial and emotional level. You cannot spend 30 to 40 years of your life building a business without a strong attachment. Business is not just what you do … but who you are.
This complex process requires specialized advice from your accountant, business appraiser, tax advisor, corporate attorney, estate planner, financial advisor and insurance advisor, among others. Coordinating and understanding the often disjointed advice can be overwhelming to a business owner who is not familiar with these concepts and terms.
The exit is also very taxing from a financial perspective, where you can surrender more than 50 percent of your harvest to taxes on the state and federal levels. In addition, each path has a different value, tax consequence and financial compromises.
Taxes can be reduced or eliminated by properly structuring, aligning and positioning the company in order to meet the complicated regulations. In this situation, time can be your best friend, so plan early.
Writing and creating the plan can take between four and nine months and will determine all your options for exiting your business.
An Exit Plan Addresses:
- Coordination of your options in concert with your personal, financial and business goals.
- Legal exit vehicles (i.e., sale, private equity, ESOP, management buyout, gifting).
- Number needed from the company to meet your retirement needs and not outlive your income.
- Financial and strategic considerations of your exit vehicles.
- Asset protection from creditor and predators.
- Options to meet financial and exit goals.
- Customized plan with the tax strategy, estate plan, income replacement, legal agreements and retirement plan that protects your wealth.
The five transfer options (sale, recapitalization, employee stock ownership plan, management buyout, and gifting) have different motives, ranges of value, tax implications, structures and fees.
A written exit plan defines the owner’s goals, the salient parts of your wealth (liquid and illiquid), the value of the available options, the “net” amount after taxes and fees, tax implication, titling of all assets to assess estate tax exposure, legal agreement review, insurances and investment considerations. An exit planner’s role is to design and to quarterback this process during the execution with the accountants, lawyers, tax professionals, insurance advisors and wealth consultants.
An exit plan also puts the owner in control with a clear path to make an informed decision, control the process, leave the business on their terms, select to whom they wish to transfer, and decide when they want to exit. The exit process liberates the owner by allowing them to move trapped money out of their business, protect their wealth, and move into the next stage of life.
The succession plan is about preparing the company to succeed in the absence of the owner/CEO. In a simple approach, it is about grooming management to move into leadership and then into ownership and ultimately establishing the new CEO. In a broader sense, it is about building value, creating a culture of continuous succession that focuses on the human capital delivering a top-quality product to your customer, reoccurring cash flow and protecting the future of the company by:
- Establishing a clear direction and focus.
- Professionalizing the company.
- Developing and improving management systems.
- Developing and training of the human capital.
- Training for teamwork (their blind spots) and leadership (focus on others).
- Selecting the new stockholders (owners).
- Moving them into ownership (focus on the company).
- Selecting the new CEO.
The owner’s mindset for succession:
- Must clearly envision their financial future before moving forward (exit plan).
- Must envision being outside of the business before initiating the succession process.
- Must control the timing of when and with whom in concert with their goals.
- Must lead the process but allow the team to grow, stretch and make mistakes.
A succession plan may take several months to write but several years to execute. The goal is to have the company run without the owner/CEO. Depending on the readiness of the management and the type of exit and current payout, a succession plan may run over three to 10 years. On the other hand, if the business is systematized, has clean financials, and mature management is in place, the company could be “sale ready” in less than a year.
Which plan comes first? Steven Covey recommends “that we begin with the end in mind.”
My professional view is the owner must first deal with the exit plan so they can ensure and envision their financial future. This then allows the owner to focus on succession so they can build the championship team that allows them let go in order to stretch and coach them into leadership and ownership.
The exit plan leads the owner through a proprietary process that will meet their business, personal and financial goals while objectively examining their options for monetizing and protecting their hard-earned wealth. Once the owner is comfortable with meeting these exiting goals, they can move into the succession goals of identifying who will be the next leaders and the CEO of the organization.
Succession is a continuous process in a best-of-class company. Annual programs should focus on developing and stretching associates and not just the replacement of key positions. In this scenario, the company would always be near a sale-ready condition. This plan can be in motion before a formal exit plan or formally executed afterward.
The great news about succession is that it adds bottom financial value no matter which exit path you take.
Remember, the key is to start early. Exiting and succession are not events but a complex process that takes time. The exit plan will get you started, and the succession plan will bring everything together to allow you to gracefully exit your business and protect your wealth.