When to Start Succession and Exit Planning

Succession planning words on a blue card in the calendar.

Alex Jensen, CFP®, CPWA®, AEP®, CEPA, Wealth Strategist

As a small business owner, you work tirelessly to build a successful business you can be proud of. But are you inadvertently failing to prepare it for the next chapter? 

Inevitably, there will come a time you need to leave your business behind — whether due to retirement or unforeseen circumstances. The more runway you give yourself, the more options you’ll have for your exit. That’s why now is the time to create a succession plan that will ensure your business continues to thrive long after you’ve turned over the reins. 

What Is Succession Planning? 

Succession planning – also known as exit planning – refers to what will happen to your business when it’s time for you to step down. The goal is to maximize the value you’ll derive from your business while simultaneously considering how to reduce your tax liability. 

There are two broad categories of exit options: internal and external. Internal exit strategies include: 

  • Transfer to a family member 
  • Management buyout 
  • Sale to existing partners 
  • Sale to employees, which often takes place through an employee stock ownership plan (ESOP) 

External exit strategies can include: 

  • Sale to a third party 
  • Recapitalization, with a private equity firm assuming a minority stake 
  • Initial public offering (IPO) 
  • Orderly liquidation (typically the last choice on the menu because it will bring you the lowest value) 

While each of these exit strategies comes with its own pros and cons, you’ll be best positioned to realize the most advantageous exit through early and thorough planning. This will allow you to create further value throughout your company’s timeline. 

The Importance of Early Succession Planning 

The most frequent obstacle to early planning that I see among small business owners involves their mindset. Their business is an incredible source of pride. It gives their life purpose. And because they can’t picture their life without their business, they put off long-term planning — which means they’re likely to have fewer options when they finally do begin to plan. 

The financial repercussions of waiting to plan can be significant. While an estimated 70% to 90% of a small business owner’s net worth is tied up in their business, nearly three-quarters of them don’t have a written financial plan in place. Without a roadmap for where you want to be financially when you do step away from your business, it’s nearly impossible to create a succession plan that takes your future needs into consideration. 

For example, let’s say you need $400,000 annually to accommodate your current lifestyle. That means you’ll need to make $10 million from the sale of your business to meet your financial needs in retirement. But what happens if your business is currently worth $2 million? That’s an $8 million wealth gap you need to fill. 

Early succession planning can shed light this wealth gap — and give you time to do something about it. I suggest working with a knowledgeable financial advisor with experience in business planning. They can provide guidance on how to accelerate your business’s value to help you obtain a higher multiple when it is time to sell. 

The Succession Planning Process 

A planned exit helps you provide continuity and stability to the organization while mitigating potential risks associated with unexpected departures and subsequent turnover. If you favor an inside exit plan, starting early can also help you identify and nurture future leaders. 

A critical first step is to focus on your personal financial plan. Reflecting on your retirement goals and the accompanying financial requirements will allow you to identify a possible wealth gap. 

Then, you’ll want to assess your business’s value. This step doesn’t have to include an official IRS-appraised value. Instead, it can be conducted by someone with expertise in the field, such as a CPA or a professional with a Certified Exit Planning Advisor (CEPA) designation earned through the Exit Planning Institute (EPI). 

Together, you’ll look at: 

  • Your exit timeline 
  • Your preferred type of exit 
  • The business’s objective appeal from a third-party perspective 

Through the prism of these factors, you can see the path forward by determining which steps to take to make the business more compelling. And as you determine the wealth gap you need to cover, you can start to pare down exit options. 

Because every situation is unique, there is no one perfect succession planning template. However, one I recommend considering is the EPI’s Value Acceleration Methodology. As mentioned, once you identify the unique value drivers of your business and deploy the right levers, you can increase the multiple that would be offered within 12 months. 

As you roll out your business succession team, you’ll want to surround yourself with the key players who will support you. Given that your personal financial plan plays such a significant role in any succession planning process, your financial advisor is an ideal candidate to play quarterback. Here at Carson, we have access to valuation software that will help assess the attractiveness and readiness of your business to help jumpstart a plan. 

Others who should be involved are your CPA, your attorney and any other trusted advisors you rely on. 

Is Succession Planning Important? 

Given the outsized role that a business plays in an owner’s life, it makes all the difference in the world to have an organized exit plan spelled out in advance. Every business owner aspires to derive maximum value from the business and conduct adequate legacy planning, so they can retire in an orderly (and lucrative) fashion. 

But all too often, I see companies affected by the “5 Ds”: death, disability, disaster, divorce and disagreement. These unexpected situations often force an owner to make decisions more rapidly – and emotionally – than they might prefer. All of a sudden, you may need to put your best-laid plans into action, and if you don’t yet have a plan you might end up having to settle for a suboptimal alternative. 

When small business owners push aside succession planning, they risk finding themselves settling for an exit that’s not what they had envisioned. In fact, as I pursued my CEPA designation, I was stopped in my tracks by a study that showed more than three-quarters of business owners who sold their businesses regretted it within a year. 

Regret is one of the most profound feelings, and I believe nothing could create a bigger sense of urgency than wanting to leave your life’s work on a high note. Don’t let your exit planning rely on factors outside your control. Instead, talk with your financial advisor about what you need to do to start planning your succession strategy today.  

Not sure where to turn? Schedule a consultation with a Carson Private Client Strategist today.


This 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. 

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