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The Three Keys to Successful Business Succession Planning



As baby boomers approach retirement age, the question begs to be asked: What happens to the businesses they own and operate? Studies suggest that as many as two-thirds of all small and midsize businesses are owned by boomers who plan to exit their companies within the next decade. Yet fewer than one in five is prepared and has a written succession or exit plan. While retirement typically is the impetus for a business owner’s exit, other unforeseen events or circumstances—such as an illness or an accident—could precipitate a departure. In any instance, a business owner generally wants to maximize the organization’s value, minimize this tax burden, and contain risk. Three important steps can help accomplish that.

Start Early
A succession plan should ideally be a part of a business plan. If it’s not, then a plan should be in place no fewer than three to five years before a planned exit from the business. Begin by considering a series of questions about future needs and desires, including:

  • When do you want to exit?
  • How much money will you need to exit?
  • To whom do you want to transfer the business?
  • How much is your business really worth today?
  • Do you have a strategy to increase the value of your business between now and your target exit date?
  • Do you know how to structure a sale or transfer to a family member or key employees to reap the greatest benefit?
  • Do you have contingency plans to enable your business to continue and provide for your family if you are unable to do so yourself?

Once you know the answers to those questions—or at least to most of them—you’re well on your way to making a successful exit. If you’re having trouble coming up with the answers, however, you could find yourself making a hasty exit without gaining the maximum value from your years of dedication.

Consult an Adviser
The tried-and-true techniques that brought you business success—such as learning from mistakes, developing a strategy based on experience, and simple trial and error—do not apply when developing an exit strategy. You’ll sell or transfer your business only once, so it’s important to make the most of the opportunity. That’s why you should consider consulting an adviser who specializes in business succession planning. Advisers have the experience that others don’t; they draw on what they have seen and learned while observing the failures and successes of other business owners in similar situations. An experienced adviser can help a business owner develop a plan that makes the most of the transition and help avoid costly mistakes.

Put It in Writing
As with any other business plan or deal, a succession plan needs to be put in writing to ensure that it is carried out as desired. The plan should include specific recommendations for the sale or transfer of the business, such as the desired buyer or receiver of the business, as well as the desired structure of the transaction. Ensure that your exit plan includes a checklist that provides a step-by-step plan of action to assist with implementation and monitoring. To keep your plan on course, the checklist should detail each action that must be taken, the individual or entity responsible, and a due date for the action item. Owning and operating a business requires a significant investment of time and energy. Protect the investment, and take the necessary steps to optimize your exit and leave the business—and its continuation—on your own terms.


A version of this article was previously published by The Daily Journal of Commerce.

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