Succession planning—or, more accurately, business exit planning—can be a critical process that can have weighty implications for business owners. When business owners think about the goals they want to achieve from a business exit, they commonly share these three goals: reduce taxes, ensure a seamless transition, and generate enough capital from the sale to achieve independence in retirement.
Many 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 typically achieved when business owners make exit planning a priority in their ongoing strategy.
Here are some common business exit planning mistakes, along with proactive measures 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 can devote planning time in smaller, more manageable increments. Owners who have a longer time horizon can address smaller issues that may help strengthen the business over time so it’s as attractive as possible to a third party when it’s 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 other professionals to provide counsel as you navigate the process.
Exit Planning Mistake 2: Thinking About the Value of the Business
Many business owners focus on driving revenue and generating profit from the business. But as a business owner who eventually wants to exit the business, you should focus on the value of the business and what drives value in your business.
A good first is getting a valuation of your company. Even when done informally, a business valuation can provide an impartial perspective that will help set realistic 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 whether there is a gap between that value and the amount you need to walk away from your business with to live the life you envision. Then you can focus on what drives value and implement strategic initiatives that help 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. Your exit strategy should be closely connected to your personal wealth plan, including how much you need from the sale to support your financial goals, how the proceeds will be invested and managed, and what tax and estate-planning considerations may arise. It should also address the larger decisions that can influence the value and marketability of the business, such as growth opportunities, management structure, ownership transition, and preparing the business to operate successfully without you.
Exit planning can also prompt important decisions about how you want to operate and build the business in the years leading up to a transition. This may include deciding where to reinvest for growth, whether to diversify customers or revenue sources, and how much risk to take on. It can also be an opportunity to address issues such as excess debt, company real estate, key person risk, or other factors that could limit your options down the road. Making these decisions with your eventual exit in mind can help preserve flexibility and avoid having to make major changes when you are already preparing to sell.
You may also consider how long you intend to remain involved in the business and develop a plan for how you will gradually transition out. You don’t have to circle a date on the calendar, but it’s helpful to have a general time frame that can help guide important business, financial, and personal decisions along the way—while recognizing that the timeline may change.
Exit Planning Mistake 4: Neglecting to Create a Favored Handoff Strategy
Once you start the process of selling your company, it may progress faster than you expected. That’s why it’s wise to have a plan for 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 can operate well without your constant presence. To help ensure the business will survive and thrive when you’re gone, you may want to take a step back from the day-to-day operations and delegate management and authority of certain aspects of the business.
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 hire a third party to help you sell your business.
Exit Planning Mistake 5: Not Seeking External Expertise
This might be the most important transaction in your life. After all, it may be the only time you sell your business, and you could be selling to a third party that has done this more than once. Your team can 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)—that 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 or an M&A firm.
Other key players include an attorney, an insurance professional, and a CPA. The attorney will help you negotiate and draft the purchase agreement with the buyer. You’ll want an attorney who regularly negotiates business sales to help ensure you get advice that protects your interests during and after the transaction.
And don’t overlook the importance of your CPA to help 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 can help business owners sidestep these common errors and navigate a business exit with confidence.
Fridrich is a non-registered associate of Cetera Wealth Services LLC.
his 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.
