Building a successful business takes hard work and dedication. Nobody ever makes the best of a business without the passionate desire to do so. If you’ve worked hard to build a business and make it successful, you will feel a genuine love for the business you have built.
Knowing how, when and why you will leave your business is also a very important factor in business success. Unfortunately far too many people don’t start planning for the time they will leave the business until it is much too late.
How late is too late? It is waiting until you’re ready to leave the business. Doing so can mean you are under more pressure and you will be more likely to make mistakes in those circumstances. This is especially true if you have a deadline by which you definitely want to move on to the next chapter of your life.
To maximise the full value your business offers, you need an exit strategy. This strategy is best planned as early as possible in advance of when you may plan to leave.
With the recent buzz about baby boomer business owners preparing to leave their companies within the next few years, there can be confusion about the different terminology used for exit strategies. There are two popular concepts that are often referred to when considering how to exit a business—succession planning and exit planning.
Many people believe that succession planning and exit planning are one and the same and can be used interchangeably when talking about owners who are in the process of leaving their businesses. However, this misconception can end up leaving you unprepared for one of the biggest financial events of your life.
Even though succession planning and exit planning are different concepts, they can work in unison to achieve your overall exit objectives. To help clear up any confusion, let’s look at the differences that exist between the two concepts.
Succession planning: focus on transferring leadership
A succession plan is essential to securing the future of your business. It’s the art of the changeover. Without a succession plan, you will strangle the future of your business and its future marketability.
A succession plan gives you control, choices and sufficient time to put management in place to run your business. The more time you give yourself, the more your team can come up to speed on new roles and responsibilities, and the easier it will be for you to let go and move on to pursue other interests or passions.
Succession planning could also be called “retention planning”—keeping it in the family.
Many owners choose to keep the business in the family when they leave. If this is something you’re thinking about, you need to consider the legal obligations, as well as the impact on family relationships.
Succession planning primarily focuses on the business itself—the transfer of leadership and/or management from one generation to the next within the business. This one-off approach usually identifies successors within a business and provides them with an opportunity to develop their skills and experience in order to replace the existing leaders of the business at a future date.
Although this is important to the livelihood of your company, succession planning typically revolves around the needs and objectives of the business and not those of you, the departing owner.
Succession planning is essentially a business continuity approach, which is one of several critical components of exit planning.
Exit planning: the comprehensive approach
Exit planning is the art of monetising the business.
Exit planning is all about maximising and preserving the transferable value of your business—it’s about creating certainty for your future wealth fund. It’s extremely important to integrate personal, financial and estate planning goals into your exit plan.
These need to be considered hand-in-glove with your business growth goals and opportunities to maximise profit and minimise tax liability on both sides. Your unquestionable objective in your exit plan is to transfer ownership and corporate value as profitably as possible.
Take this responsibility seriously early on and you will reap the rewards for all your hard work—and not give it to the taxman or others!
Exit planning is the comprehensive analysis of all of the factors that impact a business owner. Exit planning is not only the succession aspect but also other issues that can be important to you, including current and future planning with respect to your personal financial stability, your business (its value, its employees, its position in the market), your family and your community.
These issues are really basic, but people don’t like to think about them because facing your own mortality can be quite confronting.
Exit planning starts from the perspective of your goals and objectives in each of these critical areas, along with your current and projected resources (business value, personal and business financial resources), to identify the unique combination of strategies and steps that are most likely to allow you to reach your overall goals.
For example, if you happen to be slightly older and you are looking at a retirement, a big part of exit planning is considering how you’re going to fill your days. Many people envision their retirement as, more or less, a complete disengagement from responsibility and the need to plan for anything; in other words, they want to go out “without a care in the world.”
Once you’re over the euphoria of retirement after so long at work, it can get boring. Playing golf three times a week might be just fantastic for a time, but after a little while, you begin to feel there’s more to life than just simply waiting around for someone to actually interact with you.
This boredom can lead to depression, which is bad enough on its own but can bring on other issues. Studies suggest that, if people retire and simply do nothing, they can face significant health problems, including the proven reality of the brain shrinking from less activity.
Studies have also shown that men tend to suffer more after retirement than women because they’re more inclined than women to have their identity tied up in what they do for a living. For retired men, it can be difficult to be in a social situation and someone asks them, “What do you do?” They’re at a loss for words, and they feel insecure.
The number one thing you can do to avoid these issues is to give some considered thought to what your life will look like after retirement before you retire. With the retirement age being around 65, and life expectancy now well into the 80s and occasionally the 90s, you’ve got a lot of life to fill.
Taking time to think about with whom you’re going to continue your social interaction, the people in your network with whom you can continue to engage and keeping yourself active over that course of time, is crucial. Physical and mental exercise also play a huge part in creating your best life.
Exit planning uses your unique personal objectives to convert your current reality into your desired outcome. The exit planning process helps maximise the financial return, minimise tax liability, plan for contingencies and increase the likelihood of a successful transfer of the business.
Although each exit plan is unique, depending on an owner’s specific objectives, a properly crafted plan has several common steps, or elements, to cover, including:
Step 1: Owner objectives
Step 2: Business and personal financial resources
Step 3: Maximising and protecting business value
Step 4: Ownership transfers to third parties
Step 5: Ownership transfers to insiders
Step 6: Business continuity
Step 7: Personal wealth and estate planning
Building a strong and successful exit strategy, which includes components of a succession plan and an exit plan, is not necessarily complicated; however, it is an absolute must if you want to get full value from any business sale.
It’s important to remember that an overall exit strategy is a process, not a destination. It allows you to exit your business gracefully and to your own best advantage. There are many tools available to help you get into business, but an exit strategy is one of the few designed to help you get out.
If you had to leave your business tomorrow, could you do it?
Kerry Boulton is Australia’s most respected exit strategy advisor. As CEO and founder of The Exit Strategy Group, Kerry works with business owners and CEOs to maximise their profits and to prepare their business for the ultimate payday.
Her latest book, The Uncensored Truth About Exit Strategies, unmasks what’s really behind creating effective and financially sellable businesses. To order Kerry’s book, visit freeexitstrategybook.com.au/ABE