A business writer once published an article that an exit plan can also be referred to as a succession plan. Sorry, folks, but that’s just not true. They’re very different strategies intended to accomplish very different objectives, and the actions that a business owner will take to implement a succession plan will be very different from those intended primarily to achieve an exit at the highest possible price.
Let me explain.
First, a more accurate definition of the terms:
A succession plan is one in which the owner wants to turn over the running of the company to either family members or members of the internal management team. It can involve complete or only partial change in ownership. Typically the involvement of the owner doesn’t suddenly stop cold.
An exit plan, by contrast, is just that – a planned exit from all responsibilities of running the company AND a divestiture of the owner’s ownership interest as well. While it’s true that some exits involve the owner remaining partially involved for some period of time, this is almost always designed to maximize the purchase price or ensure that any contingent elements of the purchase price are resolved to mutual satisfaction.
It’s true that both plans will have some elements in common. But there are important differences. For example, remember that a succession involves passing the company to people who already have knowledge of the company, often in-depth knowledge, while an exit involves a sale to (probably) strangers. So, let’s briefly clarify some of the major differences.
Some of the unique elements of a succession plan:
- Where children are the preferred choices, an assessment of their willingness and ability to step in, with or without parental involvement
- Where the management team will be the successors, an assessment of the their preparedness for taking on that role
- A plan for providing training/coaching to fill important gaps in knowledge or experience
- Decisions about any equity consideration that might accompany the transfer of responsibility
Some of the unique elements of an exit plan, by contrast:
- Definition of discrete actions that should be taken to increase the enterprise value of the company, and then the “sub-plan” to implement as many of them as possible
- A dry run due diligence review to help prepare for the real one when the first prospective buyer’s Letter of Intent (LOI) shows up, along with their CPAs and lawyers.
- Engagement of an M&A attorney and an investment banker to support the process, handle the legal issues and create an environment that will earn the best selling price.
Admittedly this is a short and incomplete list of differences, but I hope you get the point. While a decision to move forward with a succession will involve much less complex planning than a sale and exit, neither is a walk in the park. Recognize which direction you want to go, pull together your team to lay out the plan, and don’t confuse succession with outright exit.