DKB’s Guide to Exit & Succession Planning
What is Exit & Succession Planning?
Exit planning and succession planning are two key aspects of business continuity planning. Due to their interrelated and overlapping nature, it is key to consider both as part of a holistic plan. An exit plan provides a roadmap for equity holders to best manage their business interests in order to optimize their outcomes and achieve their goals. A succession plan is a guide to the successful transfer of relationships and responsibilities from an existing management team to a new one. A bad exit plan can ruin a good succession plan and vice versa. Additionally, mutually exclusive exit and succession plans can be at odds and lead to a failure of both.
Exit Planning Steps
1. Evaluate the Company: Understanding the company as it is today is a key first step in planning. This step may incorporate an industry and market analysis; an analysis of core competencies; a SWOT analysis; an ESG materiality assessment; an estimate of value at a synergistic level, control level, and minority level; and the chart of succession discussed later.
2. Personal Finance and Estate Planning: It is important to consider the financial needs and goals of existing equity owners of the company to evaluate exit options. Adjacent to that, estate planning goals and gift & estate tax strategies must be established. Additionally, an understanding of the financial needs of potential new equity holders may also be relevant to the exit plan and is often intertwined with the succession plan.
3. Exit Options: This is the most significant step that incorporates the information gained to date from the exit and succession planning processes. Exit options can be bifurcated between inside and outside parties. Inside exit options include transfer (by gift, sale, or hybrid) to family; sale to the new management team; sale to existing partner(s); and sale to employees (commonly through an ESOP). Outside exit options include sale to a competitor, customer, or supplier; sale to a private equity, hedge, or venture capital fund; an IPO; or a liquidation. All options have a unique set of attributes and the major considerations are business continuity, sales price, risk, and timing.
4. Dotted Line: Once the ideal exit option is identified and specific details are set, the final phase is to manage the company to the exit. This can be accomplished by drawing a dotted line from the ideal sale scenario to the present day in a detailed timeline with actionable steps for the transition. This incorporates the readiness of the owner, the business, and the succession plan.
Succession Planning Steps
1. Chart of Key Persons and Tasks: In order to successfully transition management, the team must identify key persons and the responsibilities and relationships held by each. Leveraging the chart, the team will create a list of roles to fill and ideal characteristics of a candidate. The succession process is not a one to one transition, but rather a team to team transition. The changing of the guard provides an opportunity to reevaluate importance of tasks and realign for synergies. The new management team may be comprised of more or less members and possibly different positions all together.
2. Candidate Identification: With key roles to fill, candidates will be identified and evaluated for characteristics. Candidates are gauged on their skillset, personality, familiarity with company, family dynamics, and existing relationships. Internal candidates, external candidates, or a combination of can be considered and may bring a diversity of experience. Acquiring competencies outside the company’s current strengths can better manage the company to where it wants to be rather than where it’s been.
3. Transition Timeline: A long runway makes for a better takeoff. Drawing an explicit timeline of the succession transition helps new management integrate and old management slowly exit while internal and external stakeholders acclimate. Considerations for the timeline include the age and career stage of new and old management along with optimal pacing for the business itself. New management may be overwhelmed with multiple new concurrent responsibilities. Additionally, old management may struggle to give up beheld tasks. The explicit definition of timing in the transition is key to making sure it does not happen too quickly or slowly.
4. Wealth Transfer: This step is tightly tied to exit planning and can take a number of forms. The type of transfer is often dictated by the transaction considered, the relationships between parties, and personal financial considerations. Holistic planning should consider all of the outcome of each form and their tax and business consequences.
Next Steps:
If you’d like to discuss your business’s exit and succession plan, feel free to reach out to DKB. Our team has the skills and experience to help you evaluate and execute the best strategy. We’ve partnered with adjacent service providers and can help you build your team of advisors.
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