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December 9, 2024

Contributors: Gerald Wernette, CPA, CEBS, C(K)P®, CEPA

This information is derived from ��è��Ƶ’s Private Client Advisory (PCA) experience, a uniquely tax-aware approach to growing and protecting wealth through a team of specialists curated for each PCA client’s needs. ��

As a business owner, you’ve invested countless hours, resources, and passion into building your enterprise. But have you ever considered what would happen to your company — as well as to your employees, your personal and family finances, your estate, you, and your lifestyle — when you exit your business?����

What about the impact if you were forced to exit, because of an accident, illness, or other unforeseen event?����

Maybe you’ve thought about when. Perhaps you’ve worried about what if. But chances are good you haven’t planned the all-important how.����

You’re certainly not alone. According to PwC’s 2023 U.S. Family Business Survey, only 15% of family businesses owned by baby boomers today have a robust, documented, and communicated business succession plan.

The Dangers of Not Having a Business Succession Plan

Unfortunately, however, research shows that lacking a well-thought-out business succession plan can be risky. Although 100 percent of all business owners will eventually exit their business, the Exit Planning Institute’s most recent National State of Readiness Report finds:

• About 50 percent will exit unexpectedly, due to one of the “5 D’s”: death, disability, divorce, disagreement, or distress.
• Of the 200,000 small businesses listed for sale each year, only 20 to 30 percent successfully sell, leaving up to 80 percent of small businesses with a questionable future.
• Of those business owners who manage to sell, 75 percent reported they “profoundly regret” selling their company a year after selling it.�� Much of this regret can be tied to having not optimized the value of their business before they have transitioned from it.��

By not planning, you risk too much, setting yourself up for financial instability, personal dissatisfaction, and not optimizing the value of the business you’ve worked so hard to build.

But those outcomes don’t have to be your fate. And they won’t — if you put a plan in place.��

When is the Best Time to Begin Planning Your Exit Strategy?

A long-held rule of thumb in the retirement and financial planning industry suggests that business owners should begin planning their exit roughly three to seven years before retirement.

After decades of guiding owners and co-owners of small- and mid-sized businesses through mergers, acquisitions, and sales — to internal or outside buyers, private equity investors, or the next generation of family or leadership — I’ve found that there’s actually a better time to start planning your exit: the day after opening your business.��

That’s not entirely hyperbole. It’s also a mathematical fact. The earlier you begin planning, the longer runway you’ll give yourself — maximizing the time you have to impact the operations, upcoming leaders, culture and value of your business; your personal wealth and retirement; and your estate plan and legacy.����

Likewise, if the unthinkable happens, your family, your estate, your business, and your employees will be taken care of according to your wishes — not be left to the whims of an un-prepared successor or a buyer who sees no appreciation of the culture you built.��

Business Continuity & Contingency Planning … or Collapse?����������������������������

Suppose you didn’t start planning your exit on Day 2 … or Day 2,002? Does that mean you’re doomed?������

Absolutely not. It means you have no time to waste.����

Whether you hope to exit your company in 10 years or 10 months, you need a realistic, uncomplicated, and proven approach to financial and business succession planning. One that’s designed to educate and empower you — a business owner already knee-deep in the day-to-day demands of running a company — to begin working toward the future you envision now.

A herculean task? Not the way we’ll approach it.��

Begin Your Business Succession Template

Before we begin stacking the building blocks of your strategy, let’s lay out three fundamentals that will enable you to structure your succession plan on the strongest foundation possible.����

Fundamental No. 1: You are not your business.

Remember that statistic about the small percentage of business owners actually able to successfully sell their business? And how 75 percent of those sellers reported “profound regret” within one year?

That’s because the most successful business succession plans aren’t only about business. They’re a business succession-financial-estate-and-life plan in one. And the most successful encompass and integrate three aspects of planning:��

1. Personal: Your personal goals and aspirations. What do you want to achieve post-exit? This could include lifestyle changes, new projects, or philanthropic endeavors. Understanding your personal desires will guide your financial and business decisions.��
2. Financial: Your current financial situation, your projection of future needs and goals, and the creation of a strategy to meet those needs. Proper financial planning ensures you have the resources to support your desired lifestyle after exiting your business.
3. Business: Your business’s health and sustainability. This includes succession planning, improving operational efficiencies, and enhancing your business’ overall value. A robust business plan is essential not only to make your company more appealing to potential buyers but also to ensure a smoother transition for you and the next generation of leaders.��

Fundamental No. 2: Don’t Go It Alone

While this series of articles is intended to make business succession and transition planning easier to understand and execute, the reality is, business, financial, estate, and all other facets of planning that play into business succession and transition can be extraordinarily complex. For the sake of your time and effectiveness of your strategy development, I recommend you supplement what you learn in this series with the hands-on guidance of highly experienced, certified professionals.

Look for advisors who demonstrate deep knowledge in their respective field, have a track record as proactive partners, and work as a holistic team. ��

Though by no means an exhaustive list, some key members of your succession team might include:��

• A financial advisor for investment and retirement income planning
• A tax advisor to navigate tax implications and opportunities
• An estate planner to help implement your estate transition plans through your will and trust instruments, while minimizing any estate/gift tax implications
• A business consultant or fractional CFO to help identify and improve operational challenges, set goals to maximize the value of the business, and develop and manage strategies to reach them
• A human resource specialist to improve company culture, help identify and groom future leaders, manage transitions and employee relations��

Fundamental No. 3: Your exit strategy IS a business strategy.��

Don’t think of succession planning as yet another task to tack on at the end of your long day, when you’re done managing day-to-day operations. Succession planning is a vital tool you can and should integrate as part of your every day, one that primes you to think deliberately and intentionally about how the small choices you make today impact your tomorrow.

When done right – integrated with your ongoing processes – succession planning is a sound business strategy. ��It will help direct your decision-making, illuminating how and where to adjust current processes to align with future goals, and crystallizing your focus on what you can do now to drive profits and grow the value of your business. When you know where you’re headed, it’s far easier to know what the next right step will be.

About the Author: Gerald Wernette is a CPA, C(k)P-certified 401(k) professional, certified employee benefit specialist (CEBS), and certified exit planning advisor (CEPA). A founding lecturer for The Retirement Advisory University at UCLA’s Anderson School of Management and principal and director of Retirement Plan Consulting at ��è��Ƶ, Wernette has dedicated his decades of experience in individual, corporate, and partnership taxation to helping business owners develop uniquely tax-aware financial and succession planning strategies that integrate with the day-to-day demands of running and growing a successful business.

Investment advisory services offered through ��è��Ƶ Wealth a Registered Investment Advisor.��Securities offered through ��è��Ƶ Financial Network LLC, member FINRA/SIPC. Insurance Services offered through ��è��Ƶ Insurance Group.��