5 RISKS OF NOT HAVING AN EXIT PLAN
The two most important decisions in the life cycle of a business are:
- The decision you made to be an entrepreneur and take on all the risks, challenges, and rewards to run a business.
- The decision to exit. When is the appropriate time to exit and how do you want to take that final bow?
The first decision gets a lot of press. It is great fun to talk about launching a business. I wrote a book about it 7 Steps To Entrepreneurial Victory. There is energy in planning the next great marketing program that will drive your sales.
But what about the second big decision: the end zone? Some people see it as depressing. It is the end of the great entrepreneurial journey. I get that. I started a business ground up, ran it for 15 years and then sold it. I’d be lying if I didn’t admit a twinge of sadness signing the closing documents.
Mentioning the need for an exit plan often evokes two responses from a business owner:
- The glassy-eyed nod and a “yeah, yeah, yeah, I’ll get to it” response.
OR
2. A look of absolute fear and dread.
According to the Exit Planning Institute, 83% of privately held business owners have absolutely NO transition plan in place. This is a real testament as to how little attention is paid to the final phase of a business.
Business owners say they are too busy to plan for their eventual exit. Head down, they are consumed with driving revenue, keeping customers and employees happy, and the list of excuses goes on and on. They feel that it isn’t necessary…today. But it is!
And then there is the sentiment, “my business is doing great, I’ll never leave it!”
Trust me, nobody gets out of this life alive and you definitely can’t take your business with you. It is not a matter of “if” you will exit, it is a matter of “when.” You can kick that can down the road as far as you want but eventually you will exit your business.
You may not think an exit plan is important today, but if you don’t take the time to create and execute a comprehensive exit strategy, the risks are plentiful, including:
1.Building a business that does not have value that can be transferred. Many business owners begin a business and build it to create cold, hard, cash. They don’t think about exiting as it is growing or the importance of creating transferable value in the eyes of a buyer. Without an exit strategy in mind, at the end of the day, you may have focused all of your capital and energy building a business with serious holes in it that can’t be transferred. This translates into zero return on investment (ROI) for the asset you so painstakingly built.
2.Your business is stolen from you and the ROI that a business owner deserves is not achieved. 80% of business owners leave 80% of the value on the table upon selling the business. Entrepreneurs know their business. Each partner may have an archetype contribution that is specific to his or her talent with no idea how to exit the business. The owner is uninformed which leaves him or her vulnerable when engaging with a sophisticated buyer whose goal is to steal an undervalued company from an unsuspecting business owner.
3. Being forced to exit because of a lack of capital, loss of an intangible asset, changes in the general economic climate, changes in regulations, a divorce, death, or health reasons. 50% of all exits are unplanned. I’ll never forget the woman who was in her late 60s getting ready to take her business to market when her partner suddenly died of a massive heart attack. Unfortunately, she was unprepared for a sudden death and the partners did not have a funded buy-sell agreement in place. She was instantly a partner with her partner’s heirs, which historically does not make for a successful transition.
4. Overpaying in taxes upon exiting the business. Misunderstanding the terms or structure of the deal and the related tax impact of a business transition can cost you in paying more to that silent partner of yours —The United States Treasury. Exiting without a plan to protect the liquidity generated from the transition also will cost you in dollars lost.
5. Not having a post business plan for the next chapter in your life and feeling dissatisfied after exiting due to the loss of purpose that running the business provided. One year after selling a business 75% of owners “profoundly regretted” the decision because they did not have a personal plan.
Most business owners are fearful of the process. It is a fear of not knowing what to do, a fear of making the wrong decisions, a fear of being taken advantage of by a buyer or an advisor, a fear of what the next chapter post ownership looks like.
Fear is a strong emotion and often drives owners into complacency. If you choose to ignore the fact that you will one day exit your business then the chance that your fears will become realized are high.
Do not fear. An exit plan is not hard.
An exit plan is simply a strategy of how you will extract value from the company you built and transfer ownership to others.
A well-planned exit strategy coordinates the business owner’s business, financial and personal objectives. A comprehensive exit plan addresses the following:
- Business Objectives — Based on understanding the business owner’s personal readiness to exit and the company’s attractiveness to potential buyers, a specific transition plan can be developed. Is it an outright sale to a third party, a family succession plan, a recapitalization, etc.? How much control vs. liquidity does the owner desire or need? Is the company positioned to attract qualified buyers? Does the business have strategies in place to provide business continuity in the event of an unforeseen negative event? What is the value of the business? Only by analyzing these key issues to determine business attractiveness and owner readiness can the proper transition plan be developed.
- Financial Objectives — A comprehensive personal financial plan for the company’s ownership, aligned with the Business Transition Plan, will provide insight and clarity into the owner’s financial needs. What does the owner need from the sale? Are the owner’s estate plans up-to- date with current state and federal tax policy and are they coordinated with the business transition plan? Are the owner’s insurance strategies effective in protecting the business and family? What charitable plans are in place? A comprehensive Personal Financial Plan coordinated with the Business Transition Plan will assure these questions are answered with solutions provided.
- Owner’s Personal Objectives — According to data, 93% of all privately held business owners have not considered their life plans post business ownership. In other words, there is no “what’s next?” As a result, studies indicate that three out of four business owners “deeply regretted” leaving the business since they identified so closely with it. Further, this has been a major emotional barrier to designing a Business Transition Plan. Yet with 76% of all baby boomer business owners planning to hang up a “for sale” sign within the next five to ten years a “personal re-launching strategy” is mandatory. So the third leg of the stool in a Business Exit Strategy needs to be part of the post business ownership plan. How will the business owner re-launch their lives into a fulfilling next chapter?
An added benefit to creating an exit plan earlier rather than later is that business owners find that the process guides them to improve the overall business performance and transferability. When I guest lecture for Harvard University’s Entrepreneurship and Innovation class I encourage the students to prepare an exit plan in conjunction with their business plan because it will guide them to create a better business that will more likely fulfill their exit goals.
An exit strategy is simply good business strategy.
Run a business as if you will run it forever but be ready to sell it tomorrow. If you build a business with this mantra in mind the chance that you will build a business that has transferable value is much higher. Upon exit you will then have choices and can meet all of your goals.
Make creating your exit plan a #1 priority! This will ensure you fulfill your goal of turning equity into liquidity and preserving your wealth for generations to come.
Cheers,
Chris