Every business will either change ownership or cease to exist.

For many business and professional practice owners, the value of their business is a substantial part of their family’s net worth. When you own the business, you can’t just retire, not if you want to take any of the value with you. That means you must have a viable exit strategy. Actually you need more than one.

Many surveys have been conducted of business owners, especially family-owned businesses. The results are very consistent:

• Over 90% of business owners agree that they need a succession plan.
• In most surveys of small businesses over 60% said they do not have a viable succession plan.
• A substantial percentage of those who said they had a plan conceded that it was not in writing.

One major problem is that many people think only about the sale of the business for retirement. In reality there are many reasons a business owner leaves the business. A good plan prepares for all of them.

While there are many ways to exit there are four scenarios that cover most of them:

Worst Case - Catastrophic Event. The death or total incapacity or disability of the primary owner/manager. Loss of key personnel. Overwhelming competition. Financial insolvency. A great number of businesses fail every year due to the disability of death of the owner or important manager.

According to publicly available statistics 3 in 10 workers entering the work force today will become disabled before retiring (Social Security Administration 2007). Of disabilities lasting more than 90 days, the average disability for a person at 40 is 3 ½ years, for a 50 year old it is 4¼ years (1985 Commissioners Table A). Such disabilities of the key manager or professional would sink many small businesses.

The probability of death before age 65 for a 40 year old is 1 in 5. For a business with 3 partners age 40, there is more than a 50% chance that one will die before age 65 (Commissioners 1980 Mortality Table). Without a viable written succession plan, the probability of successful continuation under a disability or death scenario is very low.

Break-even or Struggling Case - Drastically Reduced Effectiveness. The Illness or partial disability of the primary owner/manager. Slack business. Increased competition. Marginal profitability.

Your Preferred Case - Best Realistic Outcome. Solid growth. Good management training. Adequate time-off to wind down. Smooth transition. Well compensated. Tax effectiveness. Plentiful take-home cash. Just like you planned

Serendipity. You receive an outlandish offer for your business that is too good to pass up. (Don’t hold your breath for it.)

A good outcome is far more likely for those who take the time to develop a realistic exit strategy. Unfortunately, too many business owners leave as a result of one of the less than optimum cases. Planning is one of those things about which they tend to say, "I’ll get around to it when I have the time." Needless to say, procrastination is easier than action, so it usually wins. Most people wait for the "right time" to prepare an exit strategy. Business Succession Consultant, John Hawkey says, "The best time to start planning your exit is from startup. The next best time is now!"  

Running a business for personal satisfaction and profit can be very rewarding. But, it is different than running a business with an eye on succession and continuation planning. Self-satisfaction often comes at the expense of failing to delegate. This, in turn, virtually precludes building a succession plan. If something unexpected happens to the do-it-all owner manager, there is no one else in a position to keep it running.

Having a well-designed exit strategy enables you to know at what point you need to focus on shifting your operating strategy. Likewise, a good plan provides for making the best of potentially bad situations as in Scenarios 1 and 2.

As the old saying of the six "P’s" goes, "prior planning prevents pathetically poor performance."

Even when approaching retirement, many owners are reluctant to put the required effort into the planning process. As a result they may leave a lot of value on the table when they retire.  

For example, it is important to have identified those who might be called upon to step up if you are unable to do the job. These individuals need to be trained and motivated to stay. They may ultimately become potential buyers. Also, it is important to have family members or others with the legal empowerment to carry on the business. Needless to say, you should have the basic estate planning documents in place such as wills and, where appropriate, trusts.

When you own the store you may be able to retire any time you want. What you walk away with is up to you - take it with you or leave it for the next guy. While it is great to contemplate the sale of a business to fund a pleasant retirement, the lack of a solid plan can cost dearly.

A strong business succession plan can offer these advantages:

• Protection from death or disability of a key person.
• Smooth transition in the event of slow-down or retirement of key person.
• Maximize the value from the sale of the business.
• Protect the interest of family members whether they are in the business or not.
• Reduce the tax impact of transfer through advance planning.

The most effective business succession plan is completed in conjunction with a comprehensive personal financial plan including tax and estate planning issues.