The Difference between Small Business Exit plans & Small Business Succession planning

Is there a big difference between Small Business Exit plans, and Succession Planning?

Absolutely!

But first, a Personal Note from Drew Browne

When I was first starting out as a new small business owner, it seemed I was forever needing to fend off salespeople who would tell me that their latest sales product, was an essential requirement above all others, for my new small business.

When it came to Succession Planning for Business, I recall a high-pressure salesman feeling very proud of himself when he insisted, "...before you even start a business, you need to have your succession plan in place first to exit the business.

'I still cringe whenever I hear the words, 'succession planning', uttered'.

• From the vantage point of age, hindsight, (and now significantly more experience), I believe that cringe was primarily because 'nobody explained the advantage of taking a more structured look at what I needed, and when I might need it – and why I might need it'.
• Ever since, the phrase business succession plan has become a trigger phrase whenever I hear it because it's usually still expressed in an environment that simply imposes a big idea on a small business owner, with no honest regard for the individual's business lifecycle they're currently in, and without first trying to see what they need, when they might need it and explaining why they need it.

For this reason, I now purposely separate the concepts of Business Emergency Exit Plans and Business Succession Plans.

If you're ready for a helpful discussion about them both, that avoids the cringeworthy one-size-fits-all sales pitch, then read on. (And if you're a salesperson who just wants to send me sales content for our blog on Business Succession strategies, please just don't).

Read in this article

Taking a new approach to a psychologically difficult conversation for any small business owner

When talking about business succession plans, you get to hear a lot of conflicting, yet hopeful, comments.

• It's about Life after business
• It's about being able to sell your business for a profit if you're forced to
• It's about the orderly transfer of ownership to another — regardless of the reasons why — when you want to

All these comments are part of the bigger conversation about, what happens when we all leave our business — unexpectedly or deliberately — and how can we make the most of each situation.

Where to start your thinking (on this touchy topic)

1. It starts with first understanding how much money does your business owe you and your family?
2. Then, recognise what part of the traditional business lifecycle your business may be in
3. Then, what are your immediate risks, and what are your future hopes or plans?

If the problem we talk about is simply too big and unstructured, we can become dangerously apathetic about it - Drew Browne, Senior Advisor @ Sapience

Regardless of your business's size or your industry

• You need a business Emergency Exit Plan today, if you want to protect yourself from the statical risks of life and business, and
• You need a business Succession Plan later, if you want a successful commercial sale or outcome for all of your hard work.

Perhaps an unhappy but necessary thought

Let's be honest: We will all depart our businesses in some way or another; unexpectedly or deliberately – mixed emotions are expected, but financial catastrophe is optional.

Some advisors make reference to working with the Five D's of business exits – Death, Disability, Divorce, Disagreement, & Distress – we can help you with three out of the five.

Small business researchers report nearly 50% of all small business owner exits, are involuntary and usually forced by unforeseen and upsetting external factors, and 79% have no Written Exit Plan to deal with them.

How you see your business determines how you protect it

Most small business owners, whether Sole Traders, Partnerships or Company & Multi Owners will usually speak of their business as their primary source of income and some will even simply say it's 'their super fund.' This of course, is based on the idea the business is valuable and over time will become sufficiently structured in a way so someone can buy it and work it themselves – and they are able to purchase it for a fair market price.

It's at this point the enthusiasm usually beings to give way to hard work and needed more thinking and preparation.

But what if you haven't yet had the chance to begin to think through and prepare for the inevitable changes in ownership of your business?

A good place to start is breaking the problem down into two separate 'types' of events and 'time' of events

1. Preparing for an unexpected transfer of business ownership – due to an unexpected sickness, injury, or even death, Or

2. Preparing for a deliberate and orderly transfer of business ownership – either as a sale, a gift, a structured buy-out by an existing Key Person or Business Partner or a sale to a competitor etc.

Depending upon the age and life cycle of your business (and its Owners and Key People) taking a two-step process for decisions required today and decisions that can happen later, might help break the mental roadblock many people face of being in business today and suddenly preparing not to be in business.

Thinking about preparing for a possible future Unexpected transfer of business ownership

Always start with understanding the highest risk that is closest to you and your business – the statistical realities of life and business

Admittedly during the early stage of a business lifecycle, there may be limited value yet to be built in the business structure, so your unexpected departure from the business - due to sickness, injury or even death - may have a lower financial impact on you or your family.

1. You would focus your efforts first on protecting yourself and your family from the business's Fixed Business Expenses,
2. You would focus your efforts on protecting yourself and your family from the financial effect a Serious Sickness or Accident might have on you.
3. You would make sure your Will either made a gift of the ownership shares of your business to the person you wanted to provide them to, and 
4. If you're a Company, you'd have a Company Power of Attorney in place too.

Thinking about preparing for a future Deliberate and orderly transfer of business ownership

Planning for future business succession is a different process, and while it may stand on the foundation of an Emergency Exit Plan, it's more future-focused on reclaiming the money the business owes you and your family and selling it as a profitable ongoing concern for a premium price.

A Business Succession Plan (some call it a Business Estate Plan) should provide all the business owners (and their spouses) with legal certainity about how the business ownership transfer should occur.

A few examples to consider might include, a Structured-Buy-Out by an existing  Key Person or Business Partners,  business valuations, life insurance policies as part of a Business Risk Transfer Plan, Partnership Agreements (for those in general partnerships), and a Buy-and-Sell Agreement for those with Multiple Business Owners.

• If you're planning to sell your business to an existing Business Partner or Key Person, you'll need to agree on a price and method of future valuation, so that usually requires a business valuation. Speak to your Accountant about which valuation method is appropriate for what you're looking to do.
• You would no doubt want to arrange the funding source for the buyout and that's where Life Insurance and Crisis Insurance can immediately cover that amount (and the CGT) so speak with us about that.
• You would no doubt want to legally document your buy and sell agreement, speak with us about that too.
• They are specialists that can help you work through systemizing processes and improving the value of your business prior to a sale as part of the Succession Planning process.

First Steps:

So where do you begin the process of creating an Emergency Exit Plan or planning a Business Ownerships Succession?

Get your insurance in place today:

• sufficient to cover your fixed overhead costs – to buy you time when most needed
• sufficient to cover the cost of your income – in case of sickness or injury - so you can focus on recovery
• sufficient to pay out all debts (and CGT)
• sufficient to buy out your business partner – if you're in a multi-owner business

To help you calculate this core business number for your small business, download our client Ongoing Fixed Business Expenses, worksheet.

Next Steps:

Get your intentions documented soon.

• Sole Traders – your business ownership goes to your estate automatically as a Sole Trader and their business is seen as one in the same thing.
• Partnerships – get your Partnership Agreement in place and review it annually to make sure it's up to date.
• Company Directors – you will need a Company Power of Attorney as the role of Company Director cannot be administered from a private Power of Attorney or Power of Enduring Guardianship, and make sure your personal Will nominates who will receive your controlling interest shares if you haven't already specified that in a Buy-And-Sell Agreement.

The Succession Planning Process

Surprisingly, succession planning isn’t just about the future. It also affects how your business operates today. In fact, most business owners find that creating a succession plan improves their current operations and opportunities in startling ways.

Pro Tip: If your Accountant hasn't already raised this issue with you and calls themself a 'business adviser', you may need to check in just to clarify if they are a proactive business adviser or a reactive business adviser.