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This article was first posted on www.profitguide.com
Exit planning is a critical part of the life cycle of any business, but focusing on day-to-day operations can make it hard to sit down and go through the process. Developing a succession plan is often the biggest single financial and personal process an individual will go through.
A strong exit plan is really a continuity plan that outlines the process of transition, whether that transition is an outside sale or passing the business down to the next generation. Only about 30% of businesses survive a transition. This is alarming given that, statistically in Canada, well over 50% of the average owner/manager's personal wealth is invested in the family business.
It's important to realize the way you manage your business today has implications for tomorrow. By making a succession plan a part of your overall business plan, you'll have something that is built and managed in a way that facilitates a change in management or ownership without major disruption.
It is best to start thinking about a succession plan several years before you think you anticipate needing one. A proper lead time will allow you to choose a transition strategy and identify and groom potential successors. It should also give you time to address any structural issues, ensuring the business is stripped of any redundant assets and establishing the best value possible for the business.
When putting together an exit plan, the key areas of focus are: succession (who, how and when); maximizing value; asset management; retirement needs; and tax planning. You need to understand where the business is now, where the business needs to be and what needs to be done to fill the gap.
An exit plan has a lot of components. For example, there is the retirement plan piece. You need to work with your wealth advisor to ensure that the exit strategy works with your expectations for retirement. The plan has to be legally effective, so lawyers have to be involved. A good succession planner will take a team approach and work with your advisors to deliver a catered plan.
Working with a succession planner, you'll analyze the current value of the business –including examining statements of net worth, analyzing cash flow, and conducting industry research and market analysis. You'll also look at how much is required to fund retirement and ways of building value in the business in order to meet those needs. Working with a tax specialist, you'll be able to ensure that your tax structure allows maximum flexibility for estate planning, income and capital gains consideration.
The basic steps in putting together a complete succession plan:
Your business has been more than just your livelihood. In many cases, it represents a life's worth of hard work and commitment. Be smart and make sure that you get the most out of your succession by taking the time to plan ahead; you owe it to yourself. It is what is best for your future and the future of the company you built.
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