Exit Plan, Succession Plan, Estate Plan

“The what, the what and the what?” Dialogue from Spaceballs – by Mel Brooks

As a business matures, the owner or owners begin to dwell on the next chapter in their lives.  (For purposes of this blog, I will assume one owner.)  The preoccupation with growth and profits starts to take a second seat to retirement and perhaps their legacy.  I have seen many owners get confused by three terms which begin to get bandied about when an owner mentions he may be thinking of moving on.  So, I thought it may be helpful to provide a little primer on what these terms mean and what relevancy they may have to an owner.

I always start with the term “exit plan.”  This is the process an owner should go through if he wants to successfully transition out of his business.  This process answers two questions; “what” you want to do and “how” you are going to do it.  The owner may decide to pass his business on to others or to sell it to a third party.  In either case, there is a process for both (ours has seven steps) which helps guide the owner through one of the most important and at times difficult decisions of his life.

The second term is “succession plan” and is usually the next process.  This is the process to transition management from one generation or team to the next.  Obviously, these processes are interrelated.  I am working with an owner who is trying to execute a succession plan with his son.  He has stated that if the process is not successful (he has given it a two-year timeline) he will sell the business.  This is a fairly typical reaction but I always encourage the development of the successor level of management.  If nothing else, it serves to enhance the value of the business.

The last term is “estate planning” which is the process to transition wealth from one generation to the next.  As you might imagine, the next generation of ownership may not correlate perfectly with the next generation of management.  A great tool I use in tying these processes together is what I refer to of as the “hope” diagram.  I use three concentric circles to depict family, ownership and management.  This simple but effective tool has a way of bringing to the fore spouses of siblings and others for planning purposes.  It also helps to avoid those nasty voting control issues that can lead to business divorces (see my prior blog on this.)

I know it sounds like motherhood and apple pie, but clearly the most effective plans (which encompass all of the above) are those that involve the engagement of qualified professionals and I would strongly encourage any owner to spend the money to do so when the time to move on has come.  You will not regret it.