Apple Growth Partners

Series: The Importance of Succession Planning

Part One: First Considerations

Owning and leading a closely held business can be time-consuming, requiring absolute focus from its owner(s). However, it is essential to take time to reflect on the future of the business and its leaders. Asking questions such as, “Who will run the business after the retirement, death, or disability of a business owner?”; Or “Does the business represent a portion of the life and wealth of the business owner that they are comfortable with in the future?”; and “When would the business owner like to transition out of day-to-day leadership of the business?” These are important questions to consider when planning for the future of the business and its owners. Even if the business owner is in considerable good health and middle-aged, the worst-case scenario could occur, and suddenly, ownership of the business could be in significant jeopardy. Establishing a well-thought-out and vetted succession plan can help business owners sleep at night knowing should the unthinkable occur, the longevity of their business and its employees would be forging ahead.

Creating a succession plan isn’t a “one-and-done” task; updates should be considered regularly to help focus on the path and goals of the business and to consider changes within the realm of the company – economic, geographical, even personal (a child of the business owner coming of age to properly take over, etc.) Having these conversations amongst leaders in the business and collaborating with professional advisors to help plan and execute the succession plan transitioning business leaders is the first step.

There are significant ramifications for considering a strategy for the succession of business ownership and leadership. A successful exit and transition from the initial ownership need to consider three major factors: the business owner and their estate, the business itself, and the regulations or barriers to the exit strategy determined to transition the owner from the business. Each plays a significant role, impacting the succession plan in different ways as a business owner navigates their exit, acting as the three legs of a stool that supports a successful exit. The timing and preparation of each of the legs is important to consider as bandwidth and time horizon will impact the readiness of a business owner to transition their ownership in the business. The optimal succession plan will result in a successful position for the business owner and their estate, the desired business state for the company’s future, while utilizing a strategy that maximizes the priorities of the exiting business owner and the business.

The Business Owner and Their Estate

Careful consideration should be taken to examine the impact of the exit on the estate and personal financial situation of the business owner. First, a vision of the exit should be developed after reviewing the goals of the departure from the perspective of the business owner, which should include tax and legal liabilities, charitable and family gifting, estate planning, employee recognition, and other personal goals or aspirations (such as the timing of an exit). Each of these should be considered and appropriately addressed in selecting a succession planning strategy.

Second, a gap analysis in the personal financial situation of the business owner and estate should be considered in planning for an exit. This gap analysis should include the financial resources required to support the lifestyle of the business owner, goals for retirement, charity, and family legacy set out by the vision of the exit. A discovery meeting with an experienced financial planner or advisor can help lay out a robust gap analysis and financial plan to help drive this process.

By developing a vision of the personal and estate impact of the exit on the transitioning business owner, a detailed plan can be created with professional advisors to maximize the impact of each goal or aspiration while minimizing the effects of tax liabilities, penalties, and unintending changes to the business owner and their family.

The Business

After reviewing the vision of the exit and required financial resources, the exiting business owner should reflect on the desired state of the business after the ownership transition. Questions to consider should include, “What role will my key employees play in the transition and future of my business?”; “Will family members involved in the business play a role in the transition and future of my business after I’ve left?”; “How will the transitioning business owner shift the responsibility of being the key point of contact for the business?”; “Do I want to reward the key people involved in the success of my business as part of my succession?”; and “What kind of legacy does the business owner want to leave for their community as part of their transition?” The desired state of the business should be considered when developing a succession plan so that professional advisors and the next generation of leadership can help build the future business around that plan for the business’ next chapter.

The Exit Strategy

Many tools and approaches are presented to business owners to help maximize the personal impact of a succession plan while exiting a business. Each strategy may impact a goal or aspiration differently but should always consider the end goal of a successful transition for the business owner and the business itself while considering tax, legal, regulatory and personal impacts. When it comes time to move on from managing the day-to-day of the business ownership, the exiting owner(s) can turn to a co-owner, a family member, a key employee or employees, a third party, or a combination of these areas to execute their desired succession plan. Each of these options come with separate pros and cons and will impact the succession plan differently.

Understandably, business owners considering exiting may not know what they want. Establishing an advisory team of experienced financial and business advisors can outline each consideration in detail for decision, enabling business owners to explore all possible outcomes. The next article in our succession planning series will dive deep into different exit options.