If you’re a small business owner, it’s possible that day-to-day operations are taking up the majority of your time. After all, it’s no small feat to turn your passion into a business, grow and sustain it, and balance your personal life, too. However, it’s essential that you consider the future of your company, too, which is why the below article examines the differences between exit planning and succession planning. It’s important to understand the distinct differences between the two so you can determine what best fits your needs. To ensure that you’re on the right path in preparing for the future of your business, read on to learn about the differences between exit planning and succession planning.
Succession Planning Defined
The goal of a succession plan is to ensure the smooth transition of leadership within your organization when you leave, whether by choice or by necessity. Such transitions may occur because of retirement, disability, or unexpected health challenges, to name a few. The process of succession planning involves identifying and developing the capacity of the potential successors within your organization. The approach is typically oriented towards the people already within your organization so that you can create a talent pipeline that is ready to take on the leadership of your company at a future point in time.
A few of the principal elements of succession planning include:
- Identifying potential successors: This requires a thorough assessment of the skills and capabilities of existing employees to determine who has the potential to step into the role of ownership.
- Building the capacity of potential successors: A successful succession plan builds the leadership capacity of the potential successor. This includes training, mentoring, and coaching that will give the successor the right tools and skills to lead effectively.
- Creating the transition plan: A succession plan should include a thorough outline of the steps required for new leadership to take the helm. This includes the transfer of ownership, management responsibilities, day-to-day tasks, and other key elements of business operations.
Some business owners can easily identify one or more potential successors, while others may struggle. Keep in mind that planning early on allows you to take time to develop one or more successors over time, even if they lack some of the necessary skills and knowledge at present.
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Exit Planning Defined
The goal of exit planning is to prepare for the business owner’s departure with a focus on their long-term financial goals (both personal and business-related). It is a comprehensive process that helps the business owner achieve those financial goals by maximizing the value of the business. Your business may be one of your largest assets, and thus, may also be a critical part of your retirement or personal financial goals.
An exit plan is often a key piece to guide the process of preparing to transfer ownership or sell the business. The complexities involved in exit planning can sometimes take several years to complete.
A few of the principal elements of exit planning include:
- Valuing the business: The valuation process analyzes numerous aspects of the business to determine its current value including the management, capital structure, future earnings, and the value of its assets. It also identifies opportunities for growth and improvement.
- Preparing the business for sale: A sound exit plan will ideally be in place at least a year ahead of time. The plan should identify any potential liabilities and weaknesses along with steps to remedy them. There are also necessary financial statements and other documentation that must be prepared for a potential buyer.
- Identifying potential buyers: There are a variety of transfer options when selling a business and a good exit plan should consider the pros and cons of each that are identified. There are also a variety of considerations for potential buyers and the plan should involve research on these buyers including strategic partners, competitors, and private equity firms.
If some of these steps feel overwhelming to take on, consider using financial and legal professionals to assist you.
Exit Planning vs. Succession Planning: Key Differences
As you can see, succession planning and exit planning are both valuable endeavors, though each has a different focus and ultimate goal. The goal of the exit plan is to prepare for the business owner’s departure with a focus on their long-term financial goals, typically by maximizing the value of the business and ensuring a successful sale to a third party. Succession planning is done to ensure the smooth transition of leadership within the organization. It is oriented towards the people within the company so that a talent pipeline is created that is ready to take on leadership.
We Help Small Business Owners Plan for the Future
No matter where you are on your small business journey, Resolute Wealth Advisors can help as you plan for the future. Both succession planning and exit planning are important to the long-term success of your small business, and we would like to help you make the most of your hard work. To learn more about how we can help, click here to schedule an introductory conversation.