The terms succession planning and exit planning are sometimes used interchangeably. At the same time, legacy planning is a part of succession and exit planning strategies but can be addressed on its own for those high-net-worth individuals (HNWIs) who are not also business owners. While succession, legacy, and exit plans require care and attention, there are some important differences.
Both succession planning and exit planning fall under the umbrella of Business Transition Planning.
Business Transition Planning is the umbrella term for any strategy focused on creating, maximizing, and preserving the value of a business as it prepares for and experiences transition.
A successful strategic business transition plan targets three crucial areas of need:
- Maximize the value of the business while the business owner is still in place
- Prepare the business owner for the transition from tax strategies to life plans
- Optimize the organization structurally and culturally to weather the transition
What Makes Up a Successful Exit Plan?
Exit planning takes a comprehensive look at the structures, financial, cultural, and legal that make a successful exit possible. It is the strategic process employed when a business is going to be sold or is going to merge with a third party. Because an unknown element will impact the business valuation, its leadership, its culture, and its productivity, the process of setting up a successful exit plan can take between 3- 5 years.
Some of the essential elements of a successful exit plan are:
- Identify the Owner’s Objectives: financial goals, timing details, and people-focused objectives.
- Understand the Business’ Value: Intellectual Property (IP), revenue, market conditions, multiples, projections, bubbles, and upcoming industry trends.
- Plan for Leadership Succession: Identifying the key people who will remain with the business through the transition to ensure the business retains its value and incentivize them to weather the transition.
- Tax Planning: Implementing tax strategies to reduce the tax burden of a multi-million dollar transaction requires months if not years of planning and implementation of tools from Defined Benefit plans to life insurance tools to philanthropic bequests and more…
- Financial and Legal Structuring: Ensuring that the company’s financials accurately reflect the business’ profitability will protect the seller from future exposure to litigation. Simultaneously, it increases the value of the business while legal protection and well-structured contracts with employees, vendors, and clients will help retain the value of the business.
Who Should Have a Succession Plan?
Succession Planning is focused primarily on the transfer of leadership and financial control of the business to a family member or key employee.
When a succession plan is put in place early enough, there is an opportunity for the successor to develop their skills and experience in order to step into the leadership role and make a smooth and successful transition. For this reason, a successful succession plan can be built into the business from the beginning or, at least be implemented well before discussions begin surrounding the business owner’s transition out of a decision-making role.
When the succession plan involves an ESOP or the transfer to a key person inside the organization, there are components that need to be addressed:
- Legal details involving representations & warranties
- A transitional period during which the owner will remain in an advisory capacity
- The structure of the acquisition of the company from a financial standpoint
Generational succession requires identifying issues of control, family structure, rivalries, and the future of the company that should be addressed from a financial and cultural standpoint.
How Does a Legacy Plan Play into Exit and Succession Planning?
Legacy planning can also play a part in exit planning and succession planning. While exit and succession planning are both focused on the business owner’s departure from their role as chief decision-maker, legacy planning is focused on the impact of how:
- Increased time may have on the owner’s life and
- Increased funds may have on the community around them.
Integrating elements of legacy planning into an exit or succession plan may involve bequests to philanthropies to both offset taxes and leave a permanent positive impact behind. It may be as straightforward as the choice to remain on a board in an advisory capacity in a boardroom named for you or as complex as a trust that funds the education or ventures of generations to come.
For business owners who are HNWIs, the complexities around major money-in-motion events are not to be understated. With so much on the line, it is essential to get the right advice.
Trusted wealth advisor relationships, family back offices with lawyers who know your business structures, and reliable advisors to your family as a whole - not just to you the business owner – are important as you start to plan for an exit or succession in your business. Putting a plan in place does not mean that you have to stay on that timeline.
At Centura Wealth we help set up exit planning, and tax-advantaged strategies for major wealth transfer events and then have the flexibility to pivot when clients’ plans change. Our team focuses on unique strategic plans that are customized to your family’s needs and objectives. Reach out to learn more about how we help our clients be ready for what’s next.
For more information on generational wealth and how to transform your strategy to make it last, read our article here.