Exit Planning? Succession Planning?

More than tomato, tomahto

According to the Baylor University Institute for Family Business, 88% of owners of family businesses believe that the same family will be in control of their company in 5 years.  Yet, only 30% of family-owned businesses survive to the 2^nd generation, 12% to the 3^rd generation and 3% survive to the 4^th generation.

In the middle market business community, we often hear the terms "Succession Planning" and "Exit Planning" used interchangeably.  They are not synonymous, but rather two terms that are closely related.

We see succession planning as an important component of the exit planning process.

Exit Planning is a global approach.  It involves coordinating all the decisions a business owner needs to make prior to leaving his or her company:

·         Who should I sell to?

·         How do I maximize value?

·         How will a buyer value my company?

·         How do I minimize taxes in the process?

·         Will the sale net me enough to retire?

·         How do I coordinate the business sale with my estate planning concerns?

·         Have I handed off enough of the management duties to my management team?

·         Is my management team ready to run the business without me?

Succession Planning is more about preparing the management team to run the company in the absence of the owner.  This is of critical importance in the following scenarios:

·         The owner dies prior to sale and management needs to run the company while other arrangements are made.

·         Management is going to buy the company in a leveraged transaction

·         A third party buyer will be the eventual buyer and the management team will be an important part of the value proposition.

One of the hardest days in the life of an entrepreneur is the day he or she realizes that for the company to really grow in value, it must become "management lead" rather than entrepreneur lead."   Often the owner waits too long and a prospective buyer will discount the price for the company because the owner is still too critical to its success.

In the succession planning part of the exit planning process, we get the owner to divest his or her duties before a buyer comes in and starts looking around.

With a little imagination, the reader can see why this is important whether an owner is going the M&A route, handing the company off to family members or selling to the management team itself.

Selling to a third party, the owner must realize that a buyer looks at the business differently than he does.  That buyer must look at the business without the owner if the owner wants to cash out entirely.  This means that the management team can be a critically important asset, particularly when the company is sold to a private equity firm.  If an owner has not built strong management, he or she eliminates a large portion of the potential market for the company.

In an insider transaction, the insiders typically DON'T HAVE CASH to buy the owner out.  This means one of two things.  Either the owner will carry a note or there will be outside financing or a combination of the two.  In any case, the company has to be well enough run that those notes will get paid off.  If the management team is not trained to run the company profitably on their own, before they take over, what reasonable assurance does the note holder  (selling owner, bank or other financing source) have that they will be paid off?

If the owner is simply handing the company off to a family member through a combination of  gifts, sales and bequests, there most likely are other key members of the management team that will play a supporting role in that transition.  Making sure those other team members are securely in place can also be important in the long range success of the business.

Succession planning as outlined above is a vitally important component of a business owners exit plan, but an exit plan itself is much more far reaching.   Exit planning includes coordinating retirement and estate planning objectives.  It includes increasing value of the company prior to the transaction.  It includes minimizing risks of a transaction going bad by doing pre-due diligence planning.

So when you think of us as doing "succession planning" it's true.  But what we really do is "exit planning" which is succession planning and a lot more. Or put another way, one can do succession planning without exit planning, but one cannot do exit planning without succession planning.