Business Succession Planning & Strategies: Why Waiting Could Cost You

Succession planning should start long before you leave

One of the biggest misconceptions among business owners is that they can work out the details of a succession plan when they're ready to move on. In reality, this process should start years earlier. As Associated Bank Senior Wealth Planner George Brownell puts it, "Exit planning is present tense."

A key principle of exit planning is that you should view it as an ongoing business strategy, not a one-time event at the end of your career. Effective planning helps business owners maximize the potential value of the business and prepare financially and psychologically for what comes next.

You also need to consider integrating your overall personal financial plan into your succession plan. Take into account the concept of a “wealth gap”—the difference between what the sale of the business is likely to provide and how much you may need to cover the retirement lifestyle or future steps you’ve envisioned. Research shows that many business owners regret their exit decision when they haven't considered their personal financial plan alongside their exit strategy.

Ideally, a successful succession plan should be a three-legged stool, supported by your personal financial plan, your maximized business value and a clear exit strategy. And, as an owner, the earlier you start the process, the more options you’ll typically have.

Building a business others will want to own

Many owners struggle to objectively evaluate their company because of the emotional investment involved. "It's their baby," George says. That’s why determining what your business is truly worth requires an objective assessment.

Business valuation plays a critical part in succession planning. It helps owners understand the market value of the company and identify opportunities to accelerate that value before a future sale or transition.

Despite their deep involvement in everyday operations, a surprising number of owners really don’t know what their business is really worth—which could be a problem if they expect it to fund a significant portion of their retirement.

George emphasizes that just preparing for a future transition can often improve the business itself. "The social capital of the company and how you're preparing for it to be sold are just prudent practices," he says.

In other words, the same steps that make a business attractive to future buyers often make it stronger, more efficient and more resilient today.

Get critical knowledge out of your head and onto a document

You might know the most efficient and effective way to run certain aspects of your business, but have you shared that information? A common obstacle in closely held businesses is overreliance on the owner.

Many companies rely heavily on the founder's relationships, expertise and decision-making processes. But this personal “brain trust”—dependance on a single individual—can create risk for potential buyers, partners and heirs.

By documenting and organizing key processes, customer relationships, operating procedures and institutional knowledge, owners can actually increase their business’s value.

This process can also result in valuable insights. For example, you may discover some areas are considered "below average" and you can use this opportunity to take the time to move them closer to "best in class" as part of your exit plan.

Lifestyle business or value-creation business?

Succession planning also means that business owners need to examine what they ultimately want from their company. Of course, financial returns are high on the list, so creation of transferable enterprise value is key to attracting the right buyer.

For others, their business can be what George calls a "lifestyle company," where the owner's identity, income and daily life are deeply intertwined with the business. This is another reason to make sure your personal financial plan is keeping pace with your professional one. 

Neither approach is inherently wrong. However, if you’re planning to sell, you should understand the distinction early in your planning. A business whose success depends entirely on the founder may generate an excellent lifestyle for the right buyer, but its intricacies could make it difficult to transfer or sell at a premium price.

Preparing for the Unexpected

Not every ownership transition is planned. Death, disability, partner disputes, retirement or family circumstances can create sudden challenges. Without a formal strategy, those events can result in financial and operational uncertainty for both the business and the owner's family.

Consider these questions as you work through your succession plan:

• What happens if I become disabled or can no longer work?
• How will ownership transfer if I die?
• Who do I want to take over leadership responsibilities?
• How will my family members be supported?
• Are my personal finances in order?
• What happens if my business partner wants to retire or sell?

Formal agreements—shareholder agreements, partnership agreements, buy-sell agreements and up-to-date business valuations—help answer these questions before a crisis occurs.

In addition, George notes that business owners should focus on “de-risking” the business to ensure it’s adequately protected. Make sure to confirm your business is within regulatory compliance, that you’ve established steps to confirm operational continuity and that there’s a healthy balance between your personal and business responsibilities.

Family dynamics add another layer

Succession planning for family-owned businesses comes with a unique and deeply personal set of challenges.

While you may want to treat family members equally, this might not mean equal ownership, decision-making or management responsibilities. Family members may have different levels of involvement, expertise and interest in the business.

At this point, it’s also important to take into account the concept of the “wealth gap”—the difference between what the business is likely to provide at exit and what the owner actually needs to fund their desired lifestyle and future. Will what you leave to your family leave you with enough for your own comfortable retirement?

By meeting beforehand—a family roundtable, if you will—you can better align these relationships to skills and interests that best benefit the company. This kind of open discussion can go a long way toward resolving any conflicts or misunderstandings that could crop up later and threaten both relationships and business continuity.

A message for the next generation of entrepreneurs

With increasing interest in entrepreneurship and business ownership among younger generations, thinking about an exit strategy may seem premature. However, if you’re building a company for the long term, keeping succession in mind can help you develop stronger systems, better governance and greater value—from the beginning.

You might not know exactly how or when you’ll move on or exit your business: you simply need to build a business capable of succeeding without you.

Where can business owners get help with a succession strategy?

Many owners assume succession planning begins with lawyers or merger-and-acquisition advisors.

George suggests a more practical starting point: begin by talking to both your personal and business bankers, loan officers and other financial advisors you’ve already been working with. "Start with your current business banker relationship who knows you and your business," he says. "Let them know you’re considering your ‘what’s next.’”

From there, your banker can often help connect you with a broader team of professionals needed for successful planning, including wealth advisors, valuation specialists, accountants, attorneys and insurance professionals.

While the structure and terms of a future sale may be years down the road, remember that your first priority is to strengthen the business and build a solid foundation for whatever transition eventually occurs.

The bottom line: Succession planning is good business

Whether a business owner plans to sell, transfer ownership to family members, transition to business partners or simply prepare for the unexpected, succession planning is one of the most important strategic decisions they can make.

Good planning can allow you to not merely leave the business, but maximize its value, protect loved ones, address and reduce risks and create a future that reflects your personal and financial goals. Exit planning isn't something to think about later—it's something to start now.