As a business owner, you are in two camps.
- You are probably thinking about all the things you would like to do once you sell your business
- You have no active plans to sell your business and haven’t given it too much thought.
The two thought processes are distinctively different, but one thing should remain top of mind for business owners. You must give a substantial amount of thought to exiting the business on your terms for the right price, even if you have no active plans to leave anytime soon.
In our last blog post, I outlined the upcoming supply and demand problem. Most businesses are owned by baby boomers, many financial assets are tied in the business, and only 20% of businesses that go-to-market sell. The result – many businesses will be illiquid.
You have worked hard to build your legacy, provide for your family, and create financial stability for your employees. But when the time comes to hang up your hat, many business owners will find themselves left high and dry.
Most business owners lack the experience selling a business, from planning to execution. The most common problems faced are:
- Do not have a good idea of the value of the business
- Eventual business transition is not viewed as urgent
- Failure to know the business value
- The business can’t run without you
- Not well-versed in tax implications
- No buy/sell, key employee retention agreements in place
- And the problem finding a buyer
All these problems lead to a bad exit. When a bad exit occurs, business owners create personal and family hardships, reduced sales price, key employee departures, and large tax bills.
I was recently joined by industry expert, Jerry Woods, for a webinar titled, “Planning For Exit and Succession.” You can watch the full webinar here.
Establishing an exit plan is usually not top-of-mind; however, when it comes time to leave, having a solid plan in place ensures a successful financial future. The three main questions I always ask my clients include:
- How long do you want to stay involved in the business?
- What are your financial goals?
- Do you have investors or creditors to pay off before exiting?
Ideally, you need to begin serious planning no less than five years before your desired exit. The final 60 months will make or break your exit success. You can’t just focus on building and growing a company and think the rest will take care of itself.
Building a strong business is not enough to be assured of a successful exit. The proof lies in the details. You essentially need to know what a bigger impact on the business’s value will have – top-line revenue or bottom-line profitability grown. Growing the business, whether top-line or bottom-line, requires investment in the business. These are examples of important business decisions. Without an exit plan to follow, you cannot know whether your answers will help or hurt whenever you are ready to leave.
Time is a critical factor. While a 5-year plan is a good benchmark, earlier planning may reap more benefits. More time allocated to your goal ultimately results in greater probability of positive results. During the buildup to your exit, you want to focus on these critical issues:
- Eliminate dependency on the business owner for sales, operations, or key relationship management
- Identify, hire, onboard, and align leadership that produces sustained long0term grown
- Diversify your client base
- Address any misalignment or disagreements between the leadership team
- Design and implement ownership/leadership transfer plans
One of the biggest mistakes I see business owners make is waiting too long to start preparing for exit. I encourage every business owner to start thinking about their eventual exit now and to formulate a team of advisors that act in your best interest.
Please contact us with any questions.
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