Exit, Continuity, and Succession Planning are three rivers that end up in the same river downstream

Exit, Continuity, and Succession Planning are three rivers that end up in the same river downstream

January 15, 2021

All business owners, no matter how young or old, will exit their business.

They will exit according to a plan or because of an unknown circumstance. The main river is the exit river, it is the one that for many is the culmination of a successful business career and starts a retirement that is funded by the sale of the business and retirement savings.

The Exit River has two flows, one is from the sale of your business and the other is from your retirement savings. The sale of your business comes from successfully creating a business that can operate without you in it. It is attractive to another buyer because you own it, not because you work in it. Business Attractiveness will become even more important over the next ten years as countless baby boomer business owners seek to transfer their businesses that will likely create a buyers’ market. In a buyers’ market, the more attractive the business, the more likely it will sell.

An attractive business is one where a new buyer can pay you to leave and step in to continue operating the business and generating those future cash flows. The buyer will look at several things that will lead them to conclude you have a successful operation. Because a buyer is likely to require borrowed funds to purchase your business, their lender will require an appraisal. The SBA for example will likely require a Determination of Value or Calculation of Value. Whichever appraisal is required, it will most fundamentally be based upon several years of demonstrable tax returns that show a positive trend.

So think of the Exit Plan River as where you want to go, and what you need to make your business into for the new buyer to replace you. This is why we say that Exit Planning is simply good business planning. You need to get the plan out of your head and make it written.

A main tributary to the Exit River is the Continuity River.

Having a plan in place that addresses the unplanned is a continuity plan. What if something should happen to you as the business owner, how you keep the business going is what comprises of your continuity plan. We talk about the Five Ds that include Death, Disability, Divorce, Disaster and Disagreement. Each of these afflictions can derail your business and cause it to quickly lose value. As a business owner, you want a plan that keeps the business going even if you are not able to do it. The reason you want operations to continue is so that the operation can continue so it can be sold and you or your beneficiaries can receive a value for the business despite the affliction. How does your business operate? If you have a step by step written documentation or instructions that describe what time and who should know how to unlock the doors (where is, and who has, the spare keys), how to turn off the alarm and turn on the lights is job one. What happens next in your business, what and who does what to keep the customers coming in and services delivered so they keep paying? To help you document these steps, use a workbook to answer these questions. You may need to meet with your team to break this project up into different streams that feed into your Continuity River.

Another tributary to the Exit River is the Succession River.

To whom do you intend to sell your business? There are three distinct possibilities: Family, Insiders and Outsiders. Selling to family often involves parents transferring the business to their kids. This varies a great deal from family to family depending on several factors (i.e. more streams in our river analogy) that include how old your children are now, how capable they will be to step in and fill your shoes, and how willing they are do so. A plan to transfer within the family may take many years to develop and will likely require training, curriculum, and plenty of time to develop these new owners.

Selling to outsiders or to a third party is another tributary to the Succession River. Selling to an outsider can offer many benefits, and offer a clean break or path to your exit and onto retirement. An outsider may look at your operation more skeptically than an insider or family, because they will have to see themselves as replacing you as the owner. Setting up written job descriptions and detailed operations manuals allows the new buyer to better be able see themselves stepping in as owner.

Selling to insiders is another tributary to the Succession River. For some owners, this is a natural path because those employee managers may be well suited to continue the operations they already control today as owners in the future. A way to offer a glimpse into that future might be to sell them a minority stake now. Moving from employee to co-owner offers other challenges and opportunities that will need to be thought through and documented, as well as legalities to memorialize the arrangement.

The confluence of these three rivers is what we do at Waterfront Financial Group.

We see Exit Planning as a four phase process that starts with Assessment and Planning. Start today by completing a worksheet we use to start this conversation. We offer a complimentary Initial Consultation to see where you are at now and see where you need to get to exit this boat. We will customize a plan for you along this four phase process. 

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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Securities and advisory services offered through LPL Financial, a registered investment advisor, member FINRA/SIPC.