Issue 74

Choice Of Successor

The Third Of Five Elements In Every Successful Exit Plan

In the two previous issues of The Exit Planning Navigator®, we discussed the first two elements that must be in place before you (or your advisors) can create an Exit Plan. The first is a Target Departure Date. An Exit Plan has no relevance unless it is situated within a specific timeframe. The second element is a preliminary financial needs analysis. As owners, a sizeable portion of our wealth is tied up in our companies. Therefore, we not only need to know what our companies are worth, (read about that in the next issue) but we must also know how much money we will need upon retirement.

The third element that you must put in place to kick off your Exit Plan is to pick a Target Successor. Compared to the list of possible departure dates or the variety of needs at retirement, the list of possible successors is quite short:

  • A child, children or other family member
  • A co-owner(s)
  • A key employee (or group of key employees)
  • An unrelated third party
  • An ESOP (Employee Stock Ownership Plan)

In past issues of this newsletter, we have examined some of the pros and cons of each choice. If you are interested in third party sales, email Kevin Short ( and request Issues 13, 26 or 33. If you are interested in sales to co-owners or key employees, please request Issues 21, 34, 50 or 51. If you are interested in a sale to an ESOP, please request Issue 11.

It is our job to explain how each option can help you reach your ownership objectives and to help you to identify the best choice for you. It is also our job to help you make this choice without allowing sentimentality or emotion to overwhelm your good sense. Referring back to their financial needs analysis and to the company's preliminary valuation usually provides all of the cold water that emotional decision-makers need.

Owners often ask if it is critical to make this decision as they begin their exit planning. Why can't they just determine their exit date and financial needs as well as the value of the company? What's so important about choosing the type of successor owner?

The answer lies in the nature of what must be done to create a viable exit path with that successor owner. For example, the decision to transfer the business to one or more children triggers a host of related issues such as treating all children fairly, dealing with key employees who may view the transfer to the younger generation with more than a little trepidation, using gifting as well as a sales process to transfer ownership during the owner's lifetime to the children, and transferring the owner's interests upon death by will or trust rather than a funded buy sell agreement (or not).

In short, transferring the business to children can be at once easier-because gifting the ownership can be quite effective from an income tax standpoint, and at the same time immensely more complicated--given the nature of the parent-child and child-to-child and child-to-key employee relationships. The same is true when comparing other exit paths: Each path has advantages, which must be pursed in a certain manner using tools and concepts unique to that path.

But what happens if an Owner isn't certain of his or her choice of a successor owner? Isn't it better to make certain you have made the right choice rather than proceeding down the potentially wrong successor owner pathway? Changing paths in mid-stream inevitably causes disruption and delay in an owner's exit. But that delay is far preferable to endless procrastination. It is better to decide on the successor owner and have a back up plan if that first choice doesn't work, than to do nothing. A good back up plan allows you to reacquire any ownership you have transferred and to start over. Good planning makes certain that you do not lose control of the business until you are certain you have made the right ownership decision-and often you won't know you've made the right decision until you begin transferring ownership. Central to creating a workable exit plan is deciding upon a Target Successor and having the luxury of time to make certain that choice was the correct decision.

Subsequent issues of The Exit Planning Navigator® discuss all aspects of Exit Planning.