Often the terms succession planning and exit planning get used interchangeably. However, there is a definitive difference between the two. It’s important as a business owner that you understand the difference.
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- Succession planning focuses on transferring the power or leadership of a company.
- Exit planning focus on the transfer wealth of a business.
Succession planning is really identifying, training, and transferring the leadership/management of a company to another person or team of people. Exit planning, on the other hand, is identifying and executing the transfer strategy of a company and its ownership to another person, team, or entity.
Succession planning is almost always a part of exit planning. However done correctly, exit planning doesn’t have to end as most owners think with the sale of their business. Let me explain what I mean.
Succession Planning Without Exit Planning
For years now I have been advocating creating a self-sustaining business. What this really means is building your business in a way where it runs itself. Or at least doesn’t require you there to assure that it generates the level of cash flow and profit that you want. It’s the success stage of the growth cycle.
Succession planning is just the last step in the process. Finding that person that will take on the day-to-day role you play in running your business so that you can go off and do other things! Maybe it will let you play with that folder full of ideas that you’ve been saving because you learned how to control your “shiny object syndrome.”
Exit Planning Doesn’t Have to Mean SELL MY BUSINESS!
If your business is setup to be self-sustaining, it just becomes another investment in your portfolio. Just like your mutual funds in your 401K (if you have one). Your business’ cash flow will generate the money for your retirement.
Now, this approach is not for everyone. Some people will say, “I don’t want to mess with it. When I am ready to retire then I want to sell it and be done with it.”
That’s OK! But, if selling your business is your exit strategy, it still will have more value, and more people are available to buy it if it already has someone that can manage it.
Succession Planning Adds Values When Exiting Planning
The fantasy too many small business owners live is that they’ll find someone that can afford to pay them the $1 million they THINK their business is worth to run their business. WRONG!!! According to business broker statistics less than 25% of businesses that go on the market sell! Can you afford to leave your retirement to those odds?
People with that kind of money don’t run businesses. They buy them! Somebody else runs it for them.
A buyer will pay you more if your business already has a general manager in place to run it! They will pay you much less if they have to go find a manager; train the manager; and then transfer the management responsibility to them. In fact, they’ll probably ask you to stay on and do it as part of the deal. So, if you do it before you sell, you’ll get more when you sell. That’s why you need a succession plan!
So, succession planning is always part of building a business. While exit planning really dependent on how and to whom you plan to transfer the ownership of your business. Next week I’ll begin a discussion on the nuts and bolts of the succession planning process.
If you can’t wait or need help getting started shoot me an email!