Exit Plan vs. Succession Plan: What Small Business Owners Should Know

Summary

Small business owners should understand the differences between succession planning and exit planning as they prepare for the future.

Learn Important Nuances as you Plan for Your Company’s Future

Some small business owners may mistakenly believe that succession planning and exit planning are interchangeable terms with the same meaning. While both involve planning for the future of the business, they are actually two separate and distinct processes. We think it’s important to understand the difference between the two to help ensure that you’re taking the right steps to prepare for the future of your business. Read on to learn more about some of the differences between succession planning and exit planning for small business owners.

What Is Succession Planning?

Succession planning is the process of identifying and developing potential leaders or successors within your organization. The goal is of a succession plan is to ensure a smooth transition of leadership in the event of retirement, disability, or unexpected departure of the current business owner. Succession planning is all about identifying and nurturing talent within the organization, so that when the time comes, there are people ready to step into the shoes of the current owner.

Some key elements of succession planning include:

Identifying potential successors: This involves assessing the skills and capabilities of existing employees, and identifying those who have the potential to take on leadership roles.
Developing potential successors: An effective succession plan will include training, mentoring, and coaching to develop the skills and abilities of potential successors.
Creating a plan for transition: Lastly, a succession plan should outline the steps that will be taken when the time comes for the current owner to step down, including the transfer of ownership, management responsibilities, and other key tasks.

What Is Exit Planning?

Where succession planning focuses more on the business, exit planning focuses more on the business owner. Exit planning is a comprehensive process that assesses the business owner’s long-term financial goals (both personal and business-related) and helps to achieve those goals by maximizing the value of the business. Since the business is one of the largest assets an owner has, maximizing its value is often a crucial part of retirement or other personal financial goals.

In many cases, an exit plan is used to guide the process of preparing to sell or transfer ownership of the business. Like succession planning, exit planning can take several years to complete.

Some key elements of exit planning include:

Valuing the business: This involves determining the current value of the business and identifying opportunities for growth and improvement.
Preparing the business for sale: A successful exit plan will identify any areas of weakness or potential liabilities as well as the necessary steps to address them. It also involves preparing financial statements and other documentation to present to potential buyers.
Identifying potential buyers: An exit plan should identify the pros and cons of a variety of transfer options. It should also involve research on prospective buyers including competitors, strategic partners, and private equity firms.

Key Differences

The key difference between succession planning and exit planning is their focus. Succession planning is focused on developing and nurturing talent within the organization, while exit planning is usually focused on transferring the business to a third party, often through a sale or merger. Succession planning is about ensuring a smooth transition of leadership, while exit planning is about achieving the owner’s long-term financial goals, typically by maximizing the value of the business and ensuring a successful sale.

We Help Small Business Owners Plan for the Future

Whether you have just started your small business journey, or you’re looking to retire, Aviance Capital Partners is here to help you plan for the future. We believe both succession planning and exit planning are important pieces for the long-term success of your small business. Let the ACP team help you make the most of your hard work with small business financial planning. To learn more, click here to schedule an introductory call, or send us an email at wealthrelations@aviancepartners.com.

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