- Features | October 14, 2016
Cash Out and Pass the Baton: Understanding Exit Planning and Succession
In running your contracting business there is only one guarantee: You eventually will exit – either voluntarily or involuntarily. The day will come when you will have to say goodbye.
Exiting is not an easy process, and the odds are not in your favor. Therefore in order to succeed, the business and the owner must both be prepared to successfully transfer the business.
There is often confusion found in differentiating a business exit from a business succession. Both are needed to successfully exit your business, unlock your trapped wealth, protect your legacy, and successfully move your company into the next generation or to an external buyer.
My experience has reaffirmed that a business owner cannot commit to the difficult emotional succession process (replacing themselves) until they can clearly envision their financial future (exit plan and retirement) and accept the reality that they will not outlive their money.
An exit plan is a necessary tool that will assist the business owner in controlling and visualizing the process of transferring and monetizing their business while getting a better understanding for the financial aspects of the transaction. Since approximately 70 percent of a business owner’s wealth is trapped inside their illiquid business, this should become a top priority.
This is a risky process. Several studies have concluded that fewer than 30 percent of businesses will actually transfer or sell to employees, managers, or family, ending in liquidation or 10 percent of the business value for the owner. Further, when selling to an outsider, fewer than 20 percent of the companies that are brought to market actually close.
This is a sad statistic since most owners fumble the ball in the red zone of their career, leaving a sad legacy for the company, employees, family, spouse, and community.
And if you are fortunate enough to sell or transfer, you can be sure that Uncle Sam will be waiting there for his “fair share,” which can range from 0% to over 55% of the harvest. Ouch.
Exit Plan vs. Succession Plan
In the simplest terms:
- An exit plan focuses on monetizing the business’ trapped illiquid wealth without being clobbered by taxes and not running out of money in retirement.
- A succession plan focuses on the company successfully performing without the present owner by moving management into leadership, then ownership, and eventually replacing the empty CEO’s chair.
A succession plan provides a customized written plan that focuses on the human side of the business. Succession replaces the owner by moving the chosen performers into leadership, ownership, and the position of CEO. This requires time, training, facing blind spots, and stretching the team.
An exit plan helps secure the owner’s business wealth and sets the stage to move into succession. The plan establishes and controls the process of who, what, when, and how to control this course of action while protecting your wealth.
The exit can be complex and taxing on a financial and emotional level. You cannot spend 30 to 40 years of your life building a business without a strong attachment. Business is not just what you do but who you are.
This complex process requires specialized advice from your accountant, business appraiser, tax advisor, corporate attorney, estate planner, financial advisor, insurance advisor, and many others.
Coordinating and understanding the often disjointed advice can be overwhelming to a business owner who is not familiar with these concepts and terms.
The exit is also very taxing from a financial