In working with business owners, we find that there is confusion about the meaning of terms which leads to a confusion about how to act.  Here is our guide to clarify meaning so as to promote a more thoughtful path of action.

Succession Planning Examples

What are we to do in the event that our sales manager becomes disabled, or more likely, finds a better opportunity and leaves us?

Our shop foreman is two years from retirement, what are we doing to make sure that there will be a smooth transition to his replacement?

This concern will extend up to the top levels in the firm.

Say we have a $20 million company with 80 employees and three equal owners aged 60, 55, and 50.   Each of the owners has a key management role in the business.  If the older owner plans on retiring in five years, the younger owners (as well as other management team members) will be concerned that the company has a plan to replace her skills in the company quite apart from the issue of redeeming her stock.   The perspective here is to protect the company and ensure that it continues to run smoothly.   All business should be doing this planning, but it is a haphazard affair for many firms.

Succession planning has a significant legal component.  In the examples above, it is critical that the sales manager and shop foreman have non-compete and non-disclosure agreements.   We don’t want the sales manager to leave and take customers with him to a competitor.  Similarly, we don’t want the shop foreman to take employees or proprietary manufacturing methods to a competitor.   In the case of owners, they should have a well thought out shareholders’ agreement that will place appropriate restrictions on the transfer of the stock and establish a mechanism for buying out retiring owners.

Exit Planning Issues

The sole owner of a business has many questions to answer in planning his exit.

(1) What will his personal financial situation be after retirement – can his personal assets together with the proceeds from the sale of his business provide adequate means of support?
(2) What is the business worth?
(3) Who is the best buyer – an outside company, perhaps a competitor, or key employees?
(4) What does he need to do to protect my business while planning his exit?
(5) When will he exit?
(6) What will the business owner do after separation from the business?
(7) To what extent does the owner need to continue to work in the business after the sale in order to maintain value?  This last question shows the intersection of exit planning and succession planning.  An owner exiting his or her business must be concerned that the business can thrive without the departing owner; otherwise the business will have very little value to any buyer – 3rd party or insider.

Estate Planning
Estate planning is the concern only of the individual business owner.   Provisions must be made for the disposition of all of the business owner’s assets including any business interests.   However, a properly constituted exit plan must consider estate planning objectives.   For example, if an owner is planning to sell his business to a third-party in 3 – 5 years, it might be appropriate to transfer non-controlling business interests to children to take advantage of valuation discounts to minimize overall gift and estate tax (warning – consult your tax advisor).    Similarly, if an owner intends to transfer a business to a child and also has significant charitable interests, it might be appropriate to put a portion of the business into a Charitable Lead Trust to minimize gift tax while at the same time accomplishing charitable objectives.  Exiting a business provides an excellent opportunity to engage in estate planning transactions to help accomplish the business owner’s financial and personal goals.

Succession planning, exit planning, and estate planning all overlap but each has a separate focus.  Exit planning is the most comprehensive approach for the business owner because it requires a full consideration of both succession planning and estate planning in order for the owner to achieve her personal objectives.