Exit and succession plans: Business key decisions

Although they tend to be confused, the exit and the succession plans seek different objectives that every business owner must understand. Knowing the differences may help you make key decisions for the future of your business and your own financial security.

Sooner or later, each business owner must reflect about when and how he or she will separate from the business. To be effective, it is critical to know two key concepts that tend to be confused, but that are, in reality, different: the exit plan and the business succession plan.

For instance, an exit plan may involve the sale of the business to a third party, while the planning of a succession focuses on preparing a family member or collaborator to assume its administration. Knowing these differences is critical to safeguard the owner’s financial security, protect the value of the business and ensure the continuity of the operations.

Main concepts and objectives: Exit vs. succession

The main goal of the exit plan is to facilitate the orderly exit or transition of the owner, maximizing the economic value obtained, and aligning it with their personal and financial goals. In this plan, the business owner must be able to respond to such questions as:

•  When should I leave?
•  Will it be a full or partial exit?
•  How am I going to value my business?
•  Will I be financially independent if I no longer receive the business income once I retire?

This focus prioritizes the financial and personal wellbeing of the owner once he or she leaves the business, not the continuity.

On the other hand, the business succession planning seeks to ensure the continuity of the business in light of anticipated or unexpected events such as retirement, death, disability, divorce or bankruptcy of the owner. The most important thing is to ensure that the business may continue to operate without significant interruptions, identify and prepare the appropriate person to assume the control and the administration of the business, thus allowing for a voluntary and orderly transition of leadership, without necessarily implying the full exit of the owner.

Owner vs. business

A key difference between both concepts centers on who will be the main character in designing the strategy. In the exit plan, the focus centers on the owner: the business is assessed to determine if it is ready to be sold, transferred or closed out, and if the owner is financially, emotionally and personally prepared for the change.

A well-designed exit plan must take into consideration that, for many business owners, the business represents between 60% and 80% of the total value of their estate. Leaving without an appropriate planification could risk their financial security during retirement.

On the other hand, the planification of the business succession must determine who will continue its operation, who will be best qualified to make decisions and how to preserve or increase its value. In this instance, the business is the leading character, and the owner serves as facilitator in this transaction.

Timeframe: When to begin planning

Another difference between an exit plan and a business succession plan is determining the ideal time to begin to structure it. Generally, the first one begins two or three years prior to the date the owner plans to exit and would conclude with the sale or transfer of the business to a third party, employee, partner or family member.

On the other hand, the business succession planning is usually a longer process, involving between five and ten years. It is important to keep in mind that the transition will take place, either voluntarily or involuntarily, and, thus, in each case it is critical to plan appropriately. An involuntary succession, for instance, includes the death or disability of the owner, while a voluntary succession opens the door to an orderly transition through a duly planned retirement, whether gradual or full, once the established date is reached.

Key components of each plan

The exit plan should include such components as: the owner’s life projects after their departure, valuation and strategies to increase the value of the business, liquidity analysis and cash flow or cash needs to maintain the life style, personal and retirement financial planning, and a tax strategy in the event of the sale or transfer of the business.

Similarly, the business succession planning must take into consideration contingency plans in case of unexpected events, such as death, disability, early retirement, divorce or bankruptcy; identification and training of the successor, whether a key employee, a partner or a family member; assessment of the legal and tax structure of the business in the event of sale or transfer, and the alignment with the owner’s personal inheritance planning.

In conclusion, there are clear differences between an exit plan and a business succession plan, but both are important for the business owner who wants to make an orderly transfer in life. One of the key steps to achieve this is to prepare a personal financial plan aligned with each plan.

Thus, it is recommended to consult a specialist in financial planning who works in coordination with your trusted tax and legal consultants. In Banco Popular we can assist you. Contact your relationship officer to coordinate a meeting with your financial planner¹. You can also find more information here.  

 

 

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This article is provided for informational purposes only and should not be considered as legal, accounting, or tax advice or as a recommendation to take (or refrain from taking) any particular action. While reasonable efforts have been made to ensure accuracy, Banco Popular de Puerto Rico (BPPR) makes no representations or guarantee to the accuracy or completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information.  By providing this information, we assume that you have the capacity to analyze it, as well as the general descriptions herein presented, in order to exercise your own independent judgment.

Banco Popular and/or its subsidiaries and affiliates are not engaged in rendering legal, accounting, or tax advice. If legal, accounting, or tax assistance is required, the services of a competent professional should be sought. Please consult your accountant, attorney, and/or tax advisor for specific guidance.

¹The financial plan entails a cost, which may vary according to the extent of the contracted analysis. The general information and descriptions presented in this article are designed to help you understand the concept of financial planning and some of the factors that, in general, you should consider when evaluating a financial plan.