This comprehensive guide shows financial advisors how to:
- Identify their role in succession & exit planning. Focus on core planning principles to guide owners through succession & exit decisions without having to become specialists in value optimization, technical exit modeling, or deal strategy.
- Educate clients on the importance of a succession & exit plan. Every business owner will exit their business someday, but only a fraction have a written plan. Similar to personal financial planning, show clients the importance of having a written plan to engage in the succession & exit planning process.
- Identify client exit priorities & ideal timeline. As with all financial planning, it's important to gain an understanding of the client's goals and timeline. Identifying exit priorities and ideal timeline should be closely integrated into personal financial planning, as each will have critical impacts on future cash flow and tax considerations.
- Explore exit paths & develop a plan. Help owners understand the options they have available at a high-level. Compare transitioning to family, transitioning to their team, and selling to a third party to the client's exit priorities and life goals to assess level of alignment.
- Identify action items and coordinate resources. Once a high-level exit path has been identified, create next steps to help the owner increase their personal and business readiness for an exit. Coordinate with adjacent professionals and specialists as needed to help the owner add detail and tactics to their plan.
- Track progress and maintain accountability. Similar to personal financial planning, exit planning should be an ongoing exercise that is revisited annually leading up to the exit period and then more frequently as the exit approaches.
1. The role of a financial advisor in succession & exit planning
With the most significant transfer of private business wealth in history underway, business owners are turning to financial advisors to help them prepare for and navigate this critical moment in their financial lives.
The fundamental responsibilities of a financial advisor is to help educate their clients, clarify their priorities, create a plan that aligns with their goals, provide them resources, and help them stay on track.
The same applies in succession & exit planning.
Applying the same principles of personal planning creates real value leading up to and during one of the most important chapters of their client's life.
For business owners, succession & exit and personal financial planning have quite a bit of overlap. How and when an owner exits their business is both informed by and has meaningful impacts on retirement planning, tax planning, estate planning, and risk management considerations.
2. Educate on the importance of a plan
Every business owner will exit their business someday, in some fashion. However, only a fraction of business owners have a written succession & exit plan.
Similar to personal financial planning, show clients the importance of having a written plan to inspire them to engage in the planning process.
Start with the why
A written plan is about surfacing and documenting what's most important to the client, which outcomes matter most, and how it will be achieved. A written plan also acts as an alignment mechanism that helps owners and their team of professionals stay aligned leading up to and throughout an exit.
Discuss with owners why a written succession & exit plan is important:
- Realizing full value potential: Poor planning can lead to rushed sales or forced transitions; which can result in the realized valuation being meaningfully below potential.
- Reaching wealth goals: Without an understanding of what a successful exit looks like in terms of liquidity and goal valuation, owners may realize too late that the reality of their exit does not meet their financial and life goals.
- Personal satisfaction: Owners that don't have clarity on what's important to them for this chapter tend to be dissatisfied with their decisions. It's important to help them identify and write down their priorities, how they plan to spend their time, and what success looks like.
- Business continuity: Intentional transition planning ensures the company's legacy, employees' livelihoods, and customer relationships are protected.
Show clients the process
Similar to educating clients on personal financial planning services, outline the steps and process you will take clients through so they feel confident in the path forward.
Succession & Exit Planning Process
| Steps | Example description for clients |
|---|---|
| 1) Identify ideal exit timeline | To start we will explore how a future exit aligns with your personal financial goals. To identify your ideal exit timeline we will consider: When ideally you would like to exit or retire, What your financial needs and life goals are after transition, How much you need to save between now and exit, How much the business needs to be worth at exit and how much liquidity you need, Whether it is reasonable for the business to reach the goal valuation by your ideal exit |
| 2) Identify exit priorities | Next, we will identify what is most important to you during a future exit. To identify your exit priorities we will consider which of the following is most important to you across: Maximizing proceeds potential, Controlling the terms & timing of the exit, Staying involved v. stepping away, Preserve the business mission, values, and culture |
| 3) Explore exit paths | With an ideal exit timeline and clear exit priorities, we'll compare the unique upsides and considerations for each of the following exit paths and identify which aligns most with your priorities: Transitioning to Family, Transitioning to Team, Selling to a 3rd Party |
| 4) Action items & resources | Based on the path that aligns with your goals, we'll identify the key milestones, action items, and resources you need to prepare for exit including: Building a team of professionals to develop strategy on deal structure, tax optimization, and business growth as needed; Taking steps to feel personally ready for a new life chapter; Preparing the business for transition |
| 5) Monitor & update plan | We will revisit your succession & exit plan often to account for changes in your goals, ensure all stakeholders are aligned, and track progress on key preparations. |
3. Identify exit timeline & priorities
As with all financial planning, it's important to gain an understanding of the client's goals and timeline. Identifying exit priorities and ideal timeline should be closely integrated into personal financial planning, since an exit can represent a significant liquidity event in the owner's portfolio.
Identifying ideal exit timeline
Identifying exit timeline requires considerations for the client's:
- Ideal age at exit
- Financial needs and life goals are after transition
- Savings rate between now and exit
- Goal valuation at exit required to fund life goals
Advisors that explore these areas with their clients will open opportunities for deep personal financial planning that considers the central role the business plays in the owner's life plan.
Clarifying exit priorities
Although identifying exit priorities may be a new exercise for advisors typically focused on core financial planning, the same principles of uncovering owner goals applies.
Each exit path an owner can take has different characteristics that will impact their lifestyle, wealth, and community.
For this reason, it's important to frame conversations in a way that drives clarity using "trade-offs" or ranking exercises.
Ask owners to rank the following potential exit priorities to open meaningful conversations in this area:
- Proceeds potential. The maximum liquidity the owner may realize from that exit path after taxes and fees.
- Legacy. The preservation of the impact, reputation, and values the owner built through their business.
- Continuity. The preservation of the business's mission and practices after the owner's departure.
- Control. The level of control the owner has over the timing and terms of the exit.
- Ability to step away. The likelihood the owner will be able, if desired, to step away completely from the business.
4. Explore exit paths and develop plan
Most owners don't realize there may be a range of exit options available to them. Once the owner's ideal timeline and exit priorities are clear, help them understand what is possible and which paths align best with their identified exit priorities.
Compare transitioning to family, transitioning to their team, and selling to a third party to the client's exit priorities and life goals to assess level of alignment.
Exit Path Overview
| Exit Path | Common structures | Key considerations |
|---|---|---|
| Transition to Family - Prioritizes legacy and business continuity through family with great opportunities for tax optimization. However, this path tends to have the lowest total proceed potential and owners may struggle to step away after exit completely. | Gifting, Seller financing, On-going consulting arrangements | Is there an appropriate and prepared successor? How will this impact family relationships? How do you envision your role after the transition? How will ownership, compensation, and governance change? |
| Transition to Team - Promotes continuity of the mission through trusted team members and provides meaningful proceed potential while still allowing the owner to control the timing and terms of the exit. | Management buy-outs, Employee stock ownership plans (ESOP) | Is there a plan to strengthen and retain leaders? How will the transition be financed? How do you envision your role after the transition? |
| Sell to a 3rd Party - Typically the highest proceed potential but yields the least amount of control over timing and terms. Business continuity and job security for current team can sometimes be achieved but is not as protected as under other exit paths. | Mergers & acquisitions (M&A), Private equity restructuring, Potential rollover equity | How will different buyers impact your team and culture? What does the ideal buyer look like? Is your business ready for detailed due diligence? Do you have your team of professionals ready? |
Exit Path Comparison
| Characteristic | Transition to Family | Transition to Team | Sell to 3rd Party |
|---|---|---|---|
| Proceeds potential | Low | Moderate | High |
| Legacy | High | High | Low |
| Business continuity | High | High | Moderate |
| Control | High | High | Moderate |
| Ability to step away | Low | Moderate | High |
Once a path is identified as highly aligned with the owner's priorities, detail can start to be added to the plan by identifying next steps and coordinating specialist and adjacent professionals to help with deal structure, tax optimization, and business consulting as needed.
5. Identify action items and coordinate key resources
Once a high-level exit path has been identified, create next steps to help the owner increase their personal and business readiness for an exit.
Personal readiness
Since preparing the business usually takes center stage, personal readiness items often get overlooked when guiding business owners through exit planning. This creates an opportunity for financial advisors to differentiate themselves, help owners feel confident, and reduce the likelihood clients feel dissatisfied or overwhelmed with their exit decisions.
Personal Readiness Action Items
- Identify net proceeds from exit needed to fund goals
- Build team of professionals
- Develop tax optimization strategies
- Confirm up-to-date buy-sell agreement & insurance policy is in place
- Review succession & exit plan with family
- Identify how client will spend time and freedom after transition
Business readiness
The range of work to prepare the business for an exit will vary case to case and is dependent heavily on exit path. In the event the owner wants to sell, detailed preparations will need to be made to ensure the business is ready for diligence, transition, and is its most marketable. In other cases, business preparations may focus on ensuring the least amount of disruptions to operations and strengthening leadership.
Common Business Readiness Action Items
- Develop deal strategy
- Identify successors / buyers
- Mitigate key business risks
- Help ensure strength and retention of key employees
- Organize financial records with accountant
- Strengthen standard operating practices (SOPs)
- Prepare for legal, financial, and operational diligence
6. Track progress and maintain accountability
Similar to personal financial planning, exit planning should be an ongoing exercise that is revisited annually leading up to the exit period and then more frequently as the exit approaches.
When meeting with clients to review their plan, advisors should:
- Review and update client priorities, timeline, and goals for life after exit to look for opportunities to align their personal financial and succession & exit plans.
- Maintain accountability on action items from both the client and their team of adjacent professionals to ensure progress is moving forward.