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January 2014
The Succession (and Exit) Planning Process
By Robert Norris

     Succession planning is a process for business owners to determine exactly how a business will continue after its current owner(s) leave through either sale of the business, retirement, disability or death by creating the right “exit strategy” for the owner(s).

     We use a six step process for helping business owners create the optimum succession plan for their business and exit plan for the owner(s) which best meets their business and personal objectives. Here is a brief description of the first couple of steps in the process.


Step 1: Identification of Objectives. Assemble the Team, Determine the Goals, Identify the Stakeholders, and Identify the Owner’s (Owners’) Life Objectives.


     The first step of the process is to assemble the right team of advisors to assist the owner(s) with the planning process. Owners simply cannot develop the best plan unless they have advisors who (a) understand the process; (b) understand all the options available; and (c) have the ability to work together to help the owner(s) understand all available options.

     The team could possibly include the business’ CPA, life insurance agent, attorney, financial advisor, and anyone else necessary to make certain that all areas are addressed. From this team a facilitator should be chosen who is trained and knowledgeable about the issues involved, as well as the methods of building consensus among all the stakeholders who need to buy in to whatever plan is developed. The facilitator will work with the owner(s) and other advisors to drive the process to completion and implementation of the plan.

     The team should first establish the corporate goals of the planning process. For instance, in a case where the business owner wishes to retire and ultimately transfer ownership, management and control to his key employees, the goals might be to establish a plan for ownership transition which:


(a) Provides the sellers (owner(s)) with a reasonable financial return on their investment in the business, including reasonable retirement income;


(b) Motivates potential internal buyers to become owners of the business by providing a reasonable price for ownership and establishing with buyers that the long-term financial prospects of the business are excellent so that they become loyal employees who desire ownership in the business to the maximum extent possible; and


(c) Is the result of a process which results in a plan which is perceived to be fair and is accepted by all stakeholders (current owner(s), potential owner(s), current non-owner key employees).


     The team must also identify the stakeholders, i.e., every person who needs to buy in to this plan for it to be successful. They include current owner(s), key employees, potential future owner(s), spouses, and others.

     Once this is completed, the planning process should begin by meeting with the owner(s) and helping the owner(s) identify his/her life objectives—both business and personal. Some of the questions which the owner(s) should answer are:


1. When do you want to retire?

2. How much after-tax income do you need?

3. What do you want to do with the company?

4. What are your charitable objectives?

5. What are the other non-economic life objectives which will add significance to your life?


Step 2: Where Are We and What is the Gap?

The second step is to perform due diligence on the business and on the owner(s) to determine exactly what the current situation is, i.e., the current net worth, cash flow, and market value of the business and the business’ projected future cash flow and market value.


     Also, the owner’s (owners’) current personal financial resources must be analyzed to determine the gap which needs to be filled so that the owner(s) will be able to meet retirement income objectives.

     The team must develop an intimate knowledge of every aspect of the business—including the risk issues which need to be addressed to ensure the stability of the projected future cash flows. This planning process should be treated in the same manner as an acquisition of the business in terms of the due diligence required.

     In next month’s article, we will discuss the four remaining steps of our six step planning process for helping business owners meet their life objectives.


Robert Norris is managing partner at Wishart, Norris, Henninger & Pittman, P.A.
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