What Business Owners Should Know about Exit & Succession Planning

What Business Owners Should Know about Exit & Succession Planning

Paul Mueller

January 21, 2020

When the time comes to transfer leadership, whether in a publicly-traded or privately-held company, it is critical to implement a cohesive exit plan while also having prepared a strong succession plan for those you will leave behind. Although exit planning and succession planning are not synonymous, the two strategies are closely related and should be executed together. It is common for business owners and incumbent CEOs to avoid the topic of exit and succession planning altogether, failing to resolve issues that threaten the integrity and value of the company. Procrastination on this front leads to further consequences for all involved. 

For many business owners, most of their time is spent working “in” the business rather than “on” the business. Likewise, many large corporations have made the mistake of not planning for the exit of a CEO and are forced to scramble and react to the situation when company performance falters. According to George Abdusheleshvily, Managing Partner at Ward Howell International, “Failed succession and exit planning come at a high cost to both employees and the company’s integrity and reputation.” Abdusheleshvily has found that a botched succession plan can reduce a company’s revenue significantly, leading to a steep decline in working capital. It is important to learn from other’s mistakes and business owners run the same risk when transferring ownership. Failing to develop and implement a timely exit strategy and corresponding succession plan reduces the value of the business and increases risk to both the new owner, employees, customers, vendors, and everyone else left behind after the owner’s exit.

Below are a few key elements to the art of succession and exit planning that will create the high probability of a clean and lucrative exit.

Start Early

Transition and succession events tend to sneak up on most business owners. To combat this all-too-often scenario usually brought on by unforeseen circumstances, business owners should start preparing their organizations for leadership transition early on - whether that might be internal succession or third-party transfer. Doing this several years out pays measurable dividends when your exit moment does arrive. Consideration should be given to factors such as strength of the management team, documentation of processes and procedures, customer concentration, and distributed supply chain. Overreliance on a few key individuals could have a large, negative impact on business valuation. Having a significant percentage of revenue vested in a few key customers poses significant risk to future financial performance. And overreliance on one or two key suppliers could potentially disrupt the ability to deliver on your commitments. Addressing these issues early and tweaking them over time increases the value of a business and allows for a low-risk, high-value exit.

Get  Help 

Too many business owners are self-reliant and uncomfortable asking for assistance. Seeking proper counsel and having a seasoned professional advisor in the boat with you can be a significant benefit while you navigate the day-to-day issues of running a business. For example, a Business Coach can look at the issues facing an owner from different perspectives and then assist in developing proper corrective actions. Additionally, consider forming a Board of Advisors who can offer help with “stress-testing” these corrective actions to select appropriate paths for the highest probability of success. Taking these actions will reduce execution risk, thereby ensuring critical decisions are made with helpful counsel in order to provide lasting value and enhance an owner’s ability to exit on his or her own terms.

Have a Personal Retirement/Transition Plan

Many business transitions fail because the business owner hasn’t deeply thought through what happens next personally. Without a clear understanding of retirement goals and the next chapter after transfer of ownership, many transactions fail. It’s the old adage that “failing to plan is essentially planning to fail.” Questions need to be answered: “What price do I need to sell my company for in order to support my next objective?” “How will I spend my time after I’ve sold my company?” “Are the sale proceeds and my other financial mechanisms enough to support my intended lifestyle after exit?” “Do my business partner and I share the same expectations?” These are difficult, personal questions that should be thought through well before a decision is made to exit because the exit process brings unique pressures once started.  

Be Committed to a Clean Break

Lastly, if the company is on sound footing because the issues raised here have been addressed, if a sound management team and advisory personnel are in place, and if you are positioned to reap your hard work’s value in order to achieve your next life goal, then you have done far more than many to transfer your success to the next leader. Now go enjoy the fruits of your labor! Hanging on too long could be the subject of another article but is a common problem and can be quite damaging.

About GaP Business Advisors

Gilbert & Pardue Business Advisors (GaP) is a Houston-based business advisory firm serving lower middle market and small business owners from coast to coast through representation for Mergers & Acquisitions (M&A) and through business value-growth services such as Fractional CFO, Advisory Board, Executive Coaching, and Consulting.

Matt Gilbert and Bret Pardue established GaP to provide owners of lower middle market and small businesses – those businesses generally enjoying annual revenue of $5-$50 million – with the quality of M&A representation and value-enhancement services previously only available to middle, upper middle, and large businesses. GaP brings highly-experienced executives, sophisticated financial and marketing products, proven-effective processes, and fully-integrated expertise to every engagement. No other M&A firm serving the lower middle and small business markets provides the quality of representation and transactional expertise that we do.


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