Eric W. Seigel, Partner & Business Counsel at Tuesley Hall Konopa, LLPIn my previous post, “If You Plan to Succeed, You Need a Succession Plan,” I provided background on why business owners need to engage in succession planning (aka exit planning), and I listed ten steps as an overview of the succession planning process. This post covers the first three of those steps in greater detail.

Step 1: Assemble Your Professional Team (Financial Planning, Tax, Legal, and Insurance)

Developing and implementing a good succession plan is an interdisciplinary effort. You should involve a professional team that includes you and your financial planner, accountant, business attorney, estate planning attorney, and insurance agent. If you already have these relationships in place, you should meet with your team to discuss your desire to develop and implement a succession plan. If you do not have any of these relationships in place, now is the time to establish them. Relationship referrals tend to be the best way to make these connections, so a good approach is to ask the existing team members for referrals to help you fill the missing roles. If you only have one of these relationships in place, start by meeting with that team member and build your team from there. And be sure to have a designated quarterback (whether that is you or one of the other team members). It is important to have one person charged with keeping the process moving forward.

Step 2: Define Your Desired Personal Financial Objectives and Exit Timeline

Before you can develop an effective plan, you need to first define your desired outcomes for the plan. If you don’t know where you want to end up, then there is very little chance of you getting there. This means you have to take time to do some soul-searching about your personal objectives, both financial and otherwise. This includes your feelings about when you want to exit your business and what you want to do once you have. And this requires that you give some serious thought to what your financial needs and wants will realistically look like if your other desired outcomes are achieved. For example, if you are a 45-year-old business owner, and you want to retire when you are 65 and play golf at your local course once a week, achieving those objectives is likely going to be much easier than if you want to retire at 50 and travel the world playing every Jack Nicklaus designed golf course. Your identification of your desired outcomes for the plan, therefore, needs to include a reasonable level of needs and wants financial analysis and projections based on your income generating assets (including, of course, your business).

Step 3: Determine the Value of Your Business

Once you have your professional team in place and have defined your desired outcomes for your succession plan, the next step is for you to determine at least the approximate value of your business. This may mean an informal valuation discussion with your accountant and financial planner, or this may mean a formal business valuation by a Certified Valuation Analyst or similarly accredited professional. And it is possible you may start with an informal valuation and then later in the planning process have a formal valuation prepared when the time is right. Either way, this step is critical, as it allows you early on in the process to see whether your desired financial outcomes appear likely to match up with your financial reality. This, in turn, helps you avoid incurring unnecessary expense and frustration heading down a succession planning path that is not realistic based on your financial needs or wants and on the estimated value of your business and the income-generating value of your other assets.

Stay tuned for follow-up posts discussing the remaining succession planning steps four through ten.

Disclaimer: The THK Legal Blog is for informational purposes only and should not be relied upon as legal advice. In no case does the published material constitute an exhaustive legal study, and applicability to a particular situation depends upon an investigation of specific facts. You should consult an attorney for advice regarding your individual situation.