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Succession Planning: Preparing to Exit Your Business

Author: Larry Chester

A study conducted by the Financial Planning Association shows that within five years of retirement, 60% of advisors do not have a proper succession plan in place. For that 60%, it’s not too late to start planning now. 

Succession planning is crucial to make sure your company has a strong leadership team in place when you decide to exit your business. If a key leader leaves or passes away unexpectedly, the company might not be able to recover from the loss without a well-thought-out plan in place to fill the position.

Plan Years Ahead (not months) 

Ideally, a business owner should be thinking about a succession plan 3-5 years before their exit. In general, a succession plan should be in place to protect a company against the unexpected death of the owner, no matter how old they are. What would happen if a business owner does not have a succession plan? 

Generally speaking, succession planning and exit planning are considered when the CEO is going to step down, but it really occurs whenever the CEO is no longer available to serve their duties. 

Larry Chester, President of CFO Simplified, has had a client walk in to create a succession plan the week they are planning on leaving. Talk about a quick turnaround! Of course, this is not ideal for many reasons. 

Typically 3-5 years is the financial sweet spot for succession planning. If succession planning is rushed, hiring mistakes are more likely to occur. Oftentimes, we see business owners wait too long to start the “exit conversation.” 

The goal is to start succession planning before you are seriously thinking about leaving. There are a lot of moving parts in a business exit strategy. Some questions that you should consider when creating your exit strategy include (these questions are subject to change if there is an event of a death)

  • Who are you going to sell your business to? 
  • What will your level of involvement be after the sale? 
  • Who would you like to move into leadership in your business? 

Alongside financial goals, there is often a personal side to succession planning. You’ve put in years of hard work creating your business.  So, if you plan on selling to a family member, a co-founder, a third party, or to your employees, you are effectively entrusting them with your life’s work. This is a big decision, which should not be made lightly. This is why we, at CFO Simplified, stress the importance of exit planning and succession planning so far in advance. 

How to Start Planning to Exit Your Business

Start by defining your goals

Your exit plan largely depends on your business goals (financial and personal). When you begin planning to exit your business, it is important to start with these goals in mind. Who will you entrust to achieve them after you exit? How do the numbers hold up over time? What are the potential results of the various options? 

Identify who your key leaders are

Your leadership team is going to make or break the success of your business, even during your retirement. Succession planning is one key area that needs to be addressed early on in your exit planning process. Who will be taking the reins once you retire or leave the business? Do they have the same goals, values, and vision as you? Do they have the necessary skills to take on this new role? 

We recommend succession planning as one of the first steps in the process in order to give you and your chosen successor enough time to familiarize yourselves with the new way of business. As a business owner, you need to get comfortable with not being in control of every aspect of the business. Additionally, your leader needs time to understand what it takes to run the business.

Throughout this whole process, it is essential that you and your successor communicate effectively on the future of the business, and each of your roles in that future.  

Determine how your numbers hold up

Prepping for a sale requires a deep understanding of your company’s numbers.

Your CFO plays a large role in preparing your business for a sale. Not only do they forecast the future growth of your business, but they also play a role in drafting the sale agreement, and communicating with potential buyers. Review your business’ financial performance with your CFO prior to making any set-in-stone plans regarding your exit. 

Review all selling options

There are many options when it comes to selling your business. You can transfer ownership through a merger or acquisition, through an ESOP, or you can transfer ownership to a family member. Analyzing the costs and benefits of each option is important to understand the best option for your business.

Your CFO plays a large role in helping you understand which selling option may be right for you. 

Does your company have vulnerabilities? 

Identifying your company’s weaknesses is important to understand your value as a business. This means going through every painful “what if?” scenario and determining if your exit plan will be successful. 

Consider your culture

The financial implications that come with a sale are a no-brainer when it comes to assessing your options. Company culture, on the other hand, often gets overlooked during the planning process. 

In any business transition, your company’s culture should be a focal point. Communication is key in these situations, as you’re dealing with people and their job security. Whether that is on your own, or partnering with your HR department, creating transparency in your communication with the business during this time is essential to your success.

The risk factors

There is always risk associated with owning a business, let alone selling or transferring ownership. Analyzing your risk profile prior to selling your business, is another reason planning 3-5 years in advance is crucial to your financial and personal success. 

One of the major risk factors in exiting your business lies in succession planning. 

Forbes outlines five reasons advisor succession plans fail:

  1. Unrealistic expectations for a business valuation
  2. Not finding a good match
  3. Inadequate successor mentoring
  4. Not integrating the successor early enough
  5. Not accounting for what-if scenarios. 

Showing that if succession planning is not thoughtfully crafted to match the business owner’s personal and financial goals, the business will eventually fail. 

A final word

Let’s look forward to a few years down the road, you’ve finally made it to retirement! At CFO Simplified, we have seen our clients take this new free time and become a “helicopter former owner” We understand it can be challenging to let go of your life’s work, and learning what to do during retirement is a big change. 

We like to see this stage in life as ‘giving’ your company a new future, compared to simply ‘selling your business.  Although ownership transition is challenging to navigate, it is crucial for you to fully enjoy retirement and your life’s accomplishments. 

Noel Tichy’s book, “Succession: Mastering the Make or Break Process of Leadership Transition” highlights the importance of collaboration during and after retirement, especially with appointing a new CEO. 

“CEO succession should not be and never will be about selecting the best CEO from a pool of likely candidates. It must always be about building a continuously transforming succession pipeline carefully constructed and designed to grow truly transformational leaders on the inside. It is in this sense fundamentally about creating, coaching, and developing leaders at all levels.” 

Have you started planning to exit your business? If so, you may have already started considering your different selling options. What role does your CFO play in assessing and executing those options? Learn more on one of our recent blogs. 

Has your business been growing? If so, you have most likely considered hiring a fractional CFO. Read the questions to ask, and likely responses you will receive when looking to hire a fractional CFO on our blog.


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