What is Exit Planning?
Exit Planning is action taken on the inside of the company to make it attractive (to prospective buyers on the outside of the company) in terms of the company’s financial value and strategic value. The main purpose of exit planning is to give the business owner a huge pay day when he/she sells the company. This happens when the owner is no longer running the company and departs from the company.
Exit Planning vs Succession Planning
Succession Planning is action taken on the inside of the company to make activities on the inside of the company continue to run smoothly. The main purpose of a succession plan is to ensure that the leadership/management transition from the business owner to the new leader/manager is seamless. This happens when the owner is no longer running the company, but may still own the company.
What is the difference?
Exit Planning and Succession Planning may seem similar, but there is one key distinction between the two. Exit Planning must include succession planning, but Succession Planning does not have to include Exit Planning.
Although running a business can easily consume all of the business owner’s focus and time, it is crucial for owners to make time to sit down and assess their business’ succession planning, to safeguard the effective running of the valuable asset they have spent many years of their time building.
Failing to set out a clear plan for the future of your business in your absence could have massive negative repercussions down the line since no clearly documented objective path for the business has been mapped out. This can lead to chaos confusion, missed opportunities and costly mistakes if the business is temporarily without a leader and no contingency (succession) plan is in place. This would also be the case if a new leader is brought in to take over the business suddenly because the original leader is no longer able or available to run the business.
There is a lot more at stake and the situation becomes more complex and more difficult to solve, for the existing owner and for the future of the business if it becomes necessary to have serious discussions about both new leadership and new ownership of the business at the same time, in the absence of a succession and exit plan.
“Failing to plan is planning to fail!” – Benjamin Franklin
- In essence, it is a plan to help drive growth in the value of your business. It can also help reduce taxes and set the stage for your retirement one day. It forms an integral part of any company’s business operations and business structure and should be seen as an ever-evolving process wherein a business owner prepares his business for sale, and ultimately, his exit from the business.
Succession planning is a strategic approach to ensure that all the necessary talent, skills and resources will be available when needed, and that all the essential and specialised knowledge and abilities will be maintained when employees in key or critical positions leave the business.
The need for Succession Planning
No one sacrifices their time, energy, and resources in business without the hope that the business will “make it” and become something they can profit from one day. Entrepreneurship is ALL about building real value that endures, regardless of whether or not the founder stays or leaves the company.
Sadly, very few businesses have a plan in place for determining who will take over when the founder have come to the end of his or her time with the business.
The National Association of Corporate Directors indicated that less than 1 in 4 private businesses have formal succession plans in place. And while there might be a thousand reasons why business owners avoid setting up a succession plan, their reasons for NOT doing it are not nearly as important as the reasons why they NEED TO do it.
Let’s suppose that the board of a company feels they need to maintain their company’s intrinsic value when a successor takes over. In order to make that a reality, they need a succession plan. They will need to begin work on this plan sooner rather than later because it can take 1-3 years or 5-10 years to put a good plan in place, and it is better to have a good succession plan in place before it becomes necessary to execute that plan.
More choice: The advantage of an Exit Plan:
Although a lot of business owners run long-term succession programs in which they groom the company’s future managers and stakeholders for leadership, with the help of an Exit Plan (which always includes a Succession Plan) the business owner will get the chance to compare his/her options and might see that selling the business (rather than trying to maintain successor ownership) is a much better solution to their challenge of preserving the financial value of the asset they have invested so much into building. This is because an Exit Plan gives the business owner two options (to replace himself/herself with a successor or to sell the company) whereas a Succession Plan gives the business owner one option (to replace himself/herself with a successor).
In essence, exit planning is a multidisciplinary process. The process doesn’t just focus on the future, but instead, takes lessons from the present in order to successfully set out a clear roadmap to the future.
In order to plan for new leadership and new structures that can provide continuity within your business, you have to be in touch with the current reality of your business.
The need for succession planning is very real, and even though less than 1 in 4 businesses have formal succession plans in place, it is something that all companies have to do. All businesses need succession plans because:
- It can help alleviate issues associated with founder’s syndrome, such as interwoven identity and relinquishment of position and power. Founder’s syndrome is when a business owner has trouble understanding their role in an evolving organization and resists change
- Succession planning energizes and reassures a board by providing high-level strategy development and demonstrating that staff leadership is broadly shared and supported.
- Succession planning helps embrace diversity. Board members and staff leaders have the opportunity to search for new leaders from backgrounds and cultures different from their own and that of the current executive.