I know that it might seem quite scary to know that, at some point, you may have to step away from the business you’ve built. While you may not like the idea of exiting, it’s advisable to start planning for it long before it happens. 

Through my years of interacting with business owners, one thing that has stood out about the less-bothered ones is the presence of a plan.

My aim is to discuss the two most common forms of planning when transferring a business – succession planning vs business exit planning. 

Succession Planning vs Business Exit Planning

Many business owners use succession planning and business exit planning interchangeably. While both concepts are similar, they take different approaches to making sure your exit from your business goes well. Also, when executed correctly, they can substantially benefit your company. 

A visual representation of planning, showing the identification and prioritization of tasks to achieve a specific goal

However, using one in a situation that requires the other may not give you the desired results. Thus, as a business owner, you must understand the differences between both concepts and how/if they can work together. 

What Is Succession Planning?

Succession planning is identifying and grooming internal talent within your organization to fill key leadership positions when current leaders retire, resign, or otherwise leave their roles. The main aim of this is to make sure that the company can continue operations seamlessly if a major position is left vacant. 

As a business owner, planning for succession guarantees the continuity and stability of your company. It allows you to develop a pool of capable employees who can step into leadership roles, whether your exit is planned or unplanned. A succession plan can also involve grooming family members to take over in your absence. 

Note that to be successful, succession planning must begin several years before your exit. According to the Society for Human Resource Management (SHRM), it requires a 12-36 month preparation process, not pre-selection. Key aspects of succession planning include:

Benefits of Succession Planning

You’re probably wondering if a succession plan is worth it and why you should take the time to draft one for your business. Well, here are some of the benefits that this planning can offer:

Preserves Knowledge

With this planning, you can guarantee that important skills and knowledge unique to the organization are accurately transferred from outgoing leaders to their successors. This preserves valuable intellectual assets within the organization, even after the departure of key personnel.

Increases Employee Morale

A succession plan sends a positive message to employees about their growth opportunities within the organization. This means they are more likely to feel valued and motivated when they see clear pathways for advancement.

Reduces Recruitment Costs

Having a succession plan prevents you from scrambling around in search of recruits when a position is left vacant. This saves time and resources for sourcing, hiring, and onboarding new talent. 

A woman sitting on a couch with a laptop, engrossed in her work

What Is Business Exit Planning?

Business exit planning is a process designed to prepare business owners for the eventual sale or transfer of their business. It involves developing a comprehensive plan that outlines the steps necessary to maximize the value of the business and achieve the owner’s personal, financial, and professional goals upon exit.

Exit planning typically requires an evaluation of the business to determine its worth and identify factors that could increase or reduce its value. It mostly focuses on the sale or transfer of the business through various strategies, including: 

Unlike succession planning, which focuses mainly on business continuity, exit planning takes a wider approach. It focuses on several issues that are important to you as a business owner, including:

Benefits of a Business Exit Plan 

A well-executed business exit plan offers numerous benefits to business owners and the organization as a whole. Some of these benefits include:

Maximizes Value

An ideal business plan aims to bridge the gap between the current value of your business and the value you need to get to meet your financial goals. It does this by spelling out the steps to take to improve financial performance, operational efficiency, and market position.

Promotes Smooth Transition

By clearly outlining the steps and responsibilities involved in the transition process, an exit plan reduces the risks of confusion, minimize legal concerns, such as utility patent management and ownership, conflicts, or resistance from employees, customers, suppliers, and other stakeholders. 

Optimizes Timing

A well-executed plan allows owners to strategically time their exit based on market conditions and personal circumstances. This allows them to make use of windows of opportunity to maximize value and minimize risks associated with the exit process.

Increases Negotiating Power

Exit planning gives you greater leverage and negotiating power when engaging with potential buyers or investors. You can negotiate a good price and favorable terms by presenting a well-defined exit strategy.

A team of professionals sitting together at a table with laptops, likely working on a shared task or project

Main Differences Between a Succession Plan and an Exit Plan

One of the major differences between a succession plan and an exit plan lies in their focus. A succession plan is primarily aimed at business continuity and stability by developing internal talent within your organization. The steps involved in this include: 

On the other hand, an exit plan is more centered around preparing for the eventual sale or transfer of a business. As a result, it focuses on maximizing the value of the business and achieving your personal and financial goals post-exit. The steps involved in this include: 

Legal Considerations

Business exit planning and succession planning share common legal considerations, such as tax implications, contractual obligations, regulatory compliance, and stakeholder interests. However, the emphasis and approach differ based on each planning process’s specific goals and timelines. 

For example, succession planning may involve creating shareholder agreements, family governance structures, and employment contracts to facilitate smooth leadership transitions and mitigate family disputes. 

Business exit planning, on the other hand, may focus on structuring sale agreements, conducting due diligence, and negotiating terms with potential buyers to optimize value and minimize risks.

Which Should You Go For?

The choice between planning for succession and business exit planning should depend on your current situation, goals, and the timeline involved. If you intend to remain involved in the business for the foreseeable future and want the business to continue smoothly after your exit, a succession plan may be the more suitable option. 

On the other hand, if you are considering exiting the business in the short to medium term and wish to maximize value upon exit, exit planning may be more appropriate. This approach allows you to capitalize on opportunities in the marketplace and achieve your financial and personal goals.

The good news, however, is that there is a third option. One that allows you to combine both plans. Although they follow different approaches, drafting a succession plan and exit planning are not mutually exclusive. There are, in fact, benefits to combining both approaches. Some of these benefits include: 

Long-Term Sustainability

Combining both plans allows you to simultaneously prepare the business for a successful change of leadership while also developing internal talent to take over. This guarantees the long-term sustainability and growth of the business. 

Higher Negotiating Power

By developing a pool of internal talent through succession planning, you reduce your reliance on external recruitment. This is especially useful if your exit strategy is something like an acquihire or acquisition, as having a highly developed employee pool can positively impact the marketability and valuation of the business. This gives you a higher negotiating power during sales discussions. 

Smoother Transition

Integrating succession planning into your exit strategy makes for a smoother transfer of leadership after your exit. This is because successors are already familiar with business operations and can fit seamlessly into their roles. 

A man in a suit holding a phone and a roll of paper

Related Questions

When Should I Choose Succession Planning Over Business Exit Planning?

You should choose succession planning over exit planning when you intend to remain actively involved in the business for the foreseeable future and wish to guarantee continuity in leadership. Additionally, if you run a family-owned business, then you may want to choose the former over the latter.

When Should I Begin Succession Planning for My Business?

You should begin succession planning for your business as early as possible, ideally several years in advance of any anticipated changes in leadership. Starting early gives you enough time to identify potential successors, work on their skill gaps, and make them fully equipped to take on leadership positions. 

Is It Risky to Not Have an Exit Plan for My Business?

Yes, it can be risky not to have an exit plan in place for your business. Without an exit plan, you may be unable to maximize your gains from the business upon your exit. It may also lead to confusion regarding the ownership transfer and disruptions to business operations. 

Conclusion 

While succession planning focuses on developing internal talent for future leadership roles, business exit planning involves strategizing toward the eventual sale or transfer of the business. By integrating both plans into your business exit strategy, you can set up your organization for a successful transition upon your exit.