Planned Succession: Why You Need an Exit Strategy

What will happen to your business when you’re ready to exit?

Do you intend to sell? Or maybe you’re planning to gift it to a family member? Whether you know or not, you need to think about planned succession. 

Succession planning in SME's involves preparing for the transfer of ownership and leadership to a new owner or successor. Without it, you’re not doing yourself or the business you’ve worked so hard to build justice. 

From a financial perspective, selling your business and taking the money makes sense. However, based on what we know, around 50% of small businesses aren’t sold when the owner is ready to move on. Often, this is down to a lack of planning for succession.

Why businesses aren’t sold at the end

First, let’s take a look at some of the reasons businesses aren’t sold:

Unplanned event 

If an unexpected event happens, such as the death or disability of the owner, the business may not be sold for several reasons. 

One is that they weren’t prepared, and there isn’t a clear path forward to selling. Legal and financial issues can complicate this. The emotions of family and loved ones left behind can also make it difficult to focus on selling. 

Gift it to relatives or staff

There are several reasons why owners choose to gift their small business rather than sell, including being a kind, altruistic gesture. 

If you have a strong emotional attachment to the business, it’s a good way to preserve your legacy and ensure continuity. 

There can also be tax advantages to gifting if properly planned for and structured, such as reduced capital gains or estate tax liabilities. Plus, it can minimise disruption to business operations and culture.

Simply close and walk away 

Some owners simply choose to close their business and walk away rather than go through the process of planning for succession. 

There could be a number of different reasons for this, including believing they wouldn’t get a good price or a lack of interest in keeping their business alive.

It can also sometimes be a decision made due to failing health or a change in market conditions. 

Forced liquidation 

If a company is unable to pay its debts, creditors and shareholders can petition the court to wind the company up. This is known as involuntary liquidation. Forced liquidation can also occur if the company has breached certain legal requirements or regulations.

Once the company is liquidated, it can’t be sold. Instead, its assets are sold off by the appointed liquidator to pay its debts, and the company ceases to exist.

Benefits of planned succession

In some limited circumstances, planned succession might not be right for you. But in most cases, planned succession makes sense as a business strategy. 

Here are some of the reasons why:

• Greater financial gain – If you plan to sell your business, succession planning can help you maximise its value, ensuring you get the best possible return on investment. That means more money to retire on or to use for new ventures.
• Your business continues – A well-planned succession ensures that your business can continue to thrive, preserving the legacy you've worked so hard to build. It can offer a sense of pride. 
• Keep people employed – By planning for succession rather than closing your business, you can save jobs and give people the chance to step up in their careers. The opposite can take an emotional toll. 
• Minimise disruption – A planned succession means you have a proactive plan in place. This makes the transition into new ownership smoother for employees, customers and suppliers, particularly for unplanned events. 

Related: Why is succession planning so important?

Steps for successful succession planning

Successfully planning for succession should ideally begin several years before you plan to exit your business. You need to give yourself enough time to develop and implement a comprehensive strategy.

Here are the steps you should go through during the succession planning process:

Step 1: Choose your successor 

Think about who you want to take over your business. It could be a family member, one of your senior leaders or an outside buyer including a customer, supplier or even a competitor. Make sure you carefully consider what’s best for your business and business continuity.

If it’s a family member, employee or business partner, consider their skills, experience and willingness to take on the challenge. Would they be good future leaders?

Step 2: Get your business valued 

When you first start thinking about succession planning, it can be helpful to get an initial valuation of your business. This will give you a baseline value to work from and help you understand the potential value of your business to potential buyers or successors.

It’s also a good idea to get your business valued regularly, especially if your succession plan is long-term. This can help you track the value of your business over time and make any necessary adjustments to your plan.

Related: How do I increase the value of my business?

Step 3: Document a succession plan

Create a detailed documented succession plan outlining how and when the transition will occur. Include timelines, responsibilities and any training or development that may be required for the successor. 

Importantly, make sure you communicate this plan to all relevant stakeholders to ensure an effortless transition. 

Step 4: Consider legal and financial implications 

Navigating things like structuring the sale or transferring your business to minimise tax implications can be tricky on your own.

Therefore, we highly recommend seeking advice from legal and financial professionals to ensure your succession plan is legally sound and financially viable. We can help you with the financial side and can also recommend suitable lawyers. 

Step 5: Monitor and adjust your plan

Regularly review your succession plan and make adjustments as necessary. Circumstances may change, so it's important to stay flexible and adapt your strategy accordingly.

Experts make planning much easier

Planning for succession makes sense for many reasons. The biggest is that it means everything you’ve worked so hard for isn’t lost. Ideally, you come out on top financially, and your business continues. 

Because effective succession planning can be complex, don’t hesitate to seek expert advice. They can bring valuable insights and guidance to the table, from best practice to compliance and understanding the thorny financial considerations. 

Need help planning for business succession? Reach out to your Maxim Advisor or contact our team to arrange an initial chat with one of our succession planning experts.