What's the difference between succession planning and exit planning? If you're a family business owner, you need to know the difference between these two things. I'm gonna share it with you today on this edition of the Inside BS Show. Hey now, I'm Dave Lorenzo.

I'm the godfather of growth. This is the Inside BS Show. We're here every day at 6 a.m. with a brand new show for family business owners who are looking to grow their business and protect their legacy at the same time.

So succession planning is about who's up next for each role and exit planning is about the divestiture of ownership. That's how you tell the difference between the two. Now why are we having this conversation today and what are some examples of each? I'm gonna cover all that.

So the reason we're having this conversation today is because sophisticated people confuse the two of these things all the time. I was on the phone with a sophisticated Vistage chair. This is a person leading a Vistage group last week and he was asking me about a succession planning seminar that I do.

It's a half day seminar for CEOs and he said to me, is this a succession planning seminar that's an operational succession planning seminar or is it an executive succession planning seminar? And I said, I haven't heard that terminology before. Would you mind telling me what the difference is, please? And he said, well, an operational succession planning process is when you plan on who's going to take the place of a manager and then an executive succession planning program is when you plan who's going to take the place of the CEO or a senior leader. And I said, my succession planning methodology can be used for any role in the organization.

And he said, that's impossible. It's either operational succession planning or executive succession planning. If you're selling the business, you can't use the same methodology as if you're replacing a mid-level manager.

And I said, you're right. Selling the business and replacing a mid-level manager are two different things. In fact, I call them two different things.

Selling the business would be part of an exit plan and replacing a mid-level manager would be part of succession planning. So let me clear this up for you right now. Here's how I view both of these things and here's how both of these things break down in my world, in the world of Exit Success Lab, in the world of the people that we work with.

An exit plan involves you selling a portion of your ownership or all of your ownership in the company. It doesn't matter who you're selling the ownership of the company to, but it involves you selling a portion or all of your ownership. So you can have an internal exit strategy, an internal exit plan, and you can have an external exit plan.

You should also have a contingency exit plan. Let me explain what each of those things are. An internal exit plan means you're selling the business to someone from within the company, someone who's familiar with the business.

So you could set up an ESOP, which is an employee stock ownership plan. If you set that up, a trust on behalf of the employees will buy your shares of the business in whole or in part, or in part first and then in whole later. That's part of your exit plan.

You could also sell to your management team. That's called a management buyout. Those are both internal exit plans or internal exit strategies.

Then there are external exit strategies. An external exit strategy could be a strategic sale. That would look like the sale to a competitor, someone who's buying your business for reasons that are where the financial reason is secondary.

They're buying your business as part of a strategic move in the marketplace. So for example, a competitor might buy you to increase their market share, or a supplier might buy you so they have a way to distribute their products or services directly to the market. That would be a strategic exit if you sought out one of those.

Another type of exit would be a financial exit. So if you sold your business to a private equity firm, private equity fund, a private equity investor like a family office, those people would be buying your business so that they could get a positive return on investment. That would be a financial buyer.

So that would be another external exit. If you had a big business and you could raise the money through an investment bank, you could potentially go public. You could sell your stock on one of the publicly traded stock exchanges, and that would be an external exit.

So internal exits, external exits, and then contingency exits. What's a contingency exit? Well, a contingency exit is if you're disabled and you have a plan in place to have an interim CEO come in funded by a disability insurance policy that the company has on you. That would be a way for you to have a contingency exit plan if something suddenly happens to you.

If you pass away, the insurance policy will fund bringing in an interim CEO until a search can be conducted for a CEO to run the business. That would be a contingency exit strategy. So internal, external, and contingency exit strategies, those are for transferring the ownership of the business.

Okay, now let's talk about a succession plan. A succession plan is about who takes over a specific role, and it's about preparing that person to take over that specific role. So for the CEO, the CEO would have to think about his role or her role in three different ways.

They would have to think about the administrative aspects of the role, they would have to think about the leadership aspects of the role, and then they would have to think about the ownership aspects of the role or the investor aspects of the role. You have to plan for who's going to take over all three of those on a contingency basis if something happens to you, and on a exiting basis if you decide you're going to step away. So who in the business is going to be able to do the leadership, management, administrative, and all the investment decision options? That's going to need to pass on to somebody else, and you're going to have to get that person ready.

This is true for every role in the firm, every role in the business, from the janitor all the way up to the CEO, needs to have someone who's prepared to step into that job short-term if the person is disabled or they go on vacation, long-term if the person leaves, you can replace them with this person. Your job in whatever your role is is to spend one-third of your time getting the person behind you ready to take your spot, and then it's to spend one-third of your time getting yourself ready to move into the next position. If you're the CEO, you spend one-third of your time getting someone ready to handle the administrative, the investor portion, the person who's overseeing the entire business, one-third of your time helping someone get ready to do the management, the day-to-day stuff, and then one-third of your time helping them, coaching them up on the leadership stuff.

That's in your succession planning time, that's how you divide it up as the CEO. As a department manager, you spend a third of your time getting people ready for administrative management and leadership as well. So that takes place for every single role in the organization and that succession planning.

When the owner is willing to sell a portion or all of his ownership in the business, that's exit planning. Two different things. Now, succession planning is part of exit planning because if you have a successor for every role in the business, your business is more valuable.

So every business should have a succession plan and it should be built into the performance appraisal process, so when everybody gets their annual review, a third of their annual review should be based on who's going to fill your shoes and did you get them ready or not. That's the difference between exit planning and succession planning. If you're a family business owner, now you know the difference.

You need to work on both of those things and if you have any questions, give me a call. I'm Dave Lorenzo. You can reach me at 305-692-5531.

Dave Lorenzo, 305-692-5531. Thanks for joining me. We'll see you back here again tomorrow for another edition of the Inside BS.