Every business owner will one day exit their business, voluntarily or involuntarily. This typically happens when certain business and personal objectives are achieved: the first (and usually prerequisite to all others) is financial security. When the time comes to get off the ride, business owners will need to create a transition plan. This aims for a seamless move to retirement.
Avoiding planning not only puts future financial security at risk but also overlooks the company’s need to grow in value efficiently and quickly in carefully targeted areas. Growing and protecting value is at the core of Transition Planning. To identify where and how to spend precious company resources (i.e., your time and money) for the greatest impact is a key Transition Planning task. It is just as important as identifying and implementing strategies to minimize both current taxes and the tax bill when you transfer the company. It makes sense to start planning early. The simple reality is that most owners don’t plan; therefore, most owners are not able to leave their businesses in style.
Believe it or not, most owners do little to consciously plan and systematically move toward the all-important goal of financial security.
The four most common excuses business owners use to justify delaying and eventually ignoring Exit Planning are:
Let’s consider each of these “excuses”:
Excuse 1: When the business is worth enough to meet my financial needs, I’ll think about leaving.
This is a common and relatively reasonable assumption: Why spend time, effort, and money to plan to leave your business when you cannot do so today? Why not wait until it is at least theoretically possible to leave to begin the Exit Planning Process?
Consider the following example:
At age 45, Jerry Rowling dreamed of the day he could leave his company. The past five years that Jerry had spent trimming fat, watching every dime and developing new marketing strategies on a shoestring budget had taken their toll. Nevertheless, Jerry kept his nose to the grindstone, fully confident that if he worked hard enough, the exit he dreamed of would take care of itself.
Fast forward five more years: Jerry has remained stagnant, dreaming more frequently but doing nothing to bring about the day he could walk out the door. What had changed was that Jerry had reached his 50th birthday, a benchmark he had set years earlier as the day he’d leave the business behind.
During the five years Jerry spent working in rather than on his business, he missed the opportunity to:
- Establish his personal Exit Objectives and Goals.
- Create an Exit Plan (based on his goals) that would identify the actions he needed to take to create and protect value in the most tax-efficient way.
- Drive up Business Value to the point where he could sell, pay taxes and exit with the amount of cash necessary to achieve financial security.
What owners know to be true but often fail to act on is that growing value usually does not occur unless owners focus their efforts on deliberate actions that move their companies measurably toward their goals. In failing to act on what they know, owners don’t create or implement Exit Plans and are usually not able to exit on their terms.
Excuse 2: I Will Be Required to Work for a New Owner for Years.
If one of an owner’s Exit Objectives is to leave the business as soon as possible, he or she needs to make that a prerequisite of any sale. Some buyers require sellers to stay on after closing, but if the management team is strong, most require the former owner to remain only for short transition period, usually no more than a few months.
If the company’s management team consists only of an owner who wants to leave as soon as possible, the former owner should plan on working for the new owner for a couple of years. If the owner’s exit is still several years away, then there’s work to do.
The best way for owners to assure that they don’t become employees for a new owner is to make themselves an unnecessary expense by creating a management team that has proven its ability and motivation to make the company profitable.
Excuse 3: I When the business is ready to be sold, a buyer will find me.
One of the hard lessons of the 2008-2011 recession is that the timing of an exit depends on a vibrant economy with active buyers, a company with strong cash flow and an owner ready to sell. These factors seldom exist in equal measure at the same time.
We suspect that some owners believe that waiting for a future economic tide to bring back well-financed buyers involves little to no risk. However, this type of passivity is dangerous.
Excuse 4: This business is my life – I can’t imagine my life without it.
We all know business owners whose belly fires have gone cold and business goals have grown stale. Nonetheless, they hang on to their businesses because they can’t imagine their post-exit lives without them. We also know owners who remain energized and involved with their companies until they die. Both types will leave their businesses eventually.
If owners still are passionately engaged with their businesses and happily making a difference in their lives and the lives of others, they should not exit just to exit. However, if the passion that once burned brightly is smoldering and turning cold, it’s time to act while there’s still time.
To start Exit Planning only when the end is near fails to exploit the benefits of Exit Planning. Exit Planning involves building business value, cash flow and resiliency so that the business prospers regardless of who owns it or the owner’s Exit Objectives. Exit Planning involves protecting value and minimizing taxes, both of which are valuable endeavors regardless of an owner’s specific Exit Objectives. When departure day dawns, owners who have planned their exits are better positioned to achieve their business and financial objectives.
Certainly, the decision to sell a privately-held business is personal. No one can tell you when to exit the business or what to do with the rest of your life. Having worked with other owners, we can help guide you through the process of preparing for the biggest financial event of your life. We can help you consider the factors associated with transitioning and exiting your business and help you complete your Exit Objectives.
It would be our pleasure to discuss your business, tax and/or estate planning needs.
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