Most business owners and founders wonder how to ensure their company allows them to exit successfully in the future. But the crucial question is whether the process leaves them wealthy and satisfied or disappointed and regretful.
When it comes to one’s business exit, an owner’s top goal of transferring or selling their company is to ensure that their retirement goals are fully funded. In reality, this happens less than expected. A survey conducted by EPI uncovered the following:
- Only 20 to 30 percent of companies on the market end up selling.
- Fifty-three percent (53%) of business owners had not given any thought to a business transition plan, even though more than half were older than 51.
- Eighty percent (80%) of business owners never sought professional exit planning advice.
- Seventy percent (70%) of respondents did not know whether the after-tax income from their exit was enough to support their anticipated future lifestyle.
- Seventy-five (75%) of business owners had regrets and second thoughts merely a year after exiting their business.
These nerve-wracking statistics highlight some critical aspects of business owners’ preparednessâ€”or lack thereofâ€”for their exit. Unfortunately, the sad reality is many business owners won’t be able to exit their businesses on their terms or get their asking prices simply because they failed to prepare their businesses for transition or build their companies’ value.
Business exits fail mainly for two reasons: the owner’s unrealistic expectations and the business not being ready for exit. Let’s see how you can avoid similar circumstances in your business exit planning.
Getting the Basics Right: What Is Exit Planning?
Exit planning is a detailed, structured process to help a business owner plan their exit from their privately held company. An exit plan aims to maximize the value of the business and meet the owner’s business and personal goals. An exit plan is prepared after a complete analysis of the legal, tax, and financial documents, and it helps manage the owner’s exit from the business.
The ideal time to start the planning process is five to seven years before transitioning to new ownership. An experienced exit planning advisor spearheads the multi-step process of preparing the business to prepare the company as “built to sell.”
It’s Never Too Early to Think About Your Exit
Be precise about the timing of your exit and schedule backward to initiate the exit planning process and know how much time you have to prepare your company (and yourself) for the transition. Starting early is key!
Business owners associate exit planning with retirement and the end of their professional careers. Because they have been so involved in running their companies, they view exit planning as giving up control of their businesses. This mindset makes it difficult for them to actively prepare the business exit plan. They don’t realize that an exit plan also helps reduce risk and ensures business continuity should anything unexpected happen to the owner.
Exit plans are not set in stone; instead, they are created and revised periodically as the circumstances surrounding the business and the owner change. Therefore, it’s best not to think of your business exit plan as simply a way of getting out of a negative situation. Instead, consider it a surefire way to make the most of good conditions.
Watch market trends while you prepare your business for exit. Many entrepreneurs have missed great opportunities because they were convinced they could do better later. If a great offer comes along before you have everything in place, take it-or at least give it serious consideration.
Know Your Business Value and Close the Value Gap
Most business owners either don’t know the current value of their businesses or have an unrealistic idea of their companies’ value. They are in for a rude shock when they get a professional business valuation for the first time before their exit because that valuation will show the difference between the company’s fair market value and the owner’s expectations.
To avoid such a situation, get a business valuation done to know current value, then measure it against your business plan and retirement goals. The next step is to develop a strategic plan that builds the company’s value to close the difference between the business’s current value and the amount needed to fund your post-exit lifestyle. Understanding the value gap also helps identify where risks lie and create a plan to reduce or eliminate those risks. Focus on the key value drivers to build your business as a valuable asset for the future. Value drivers are:
- The company’s past and projected future financial performance
- The company’s growth potential through revenue expansion and future earnings predictions
- The level of working capital needed to maintain business operation
- Opportunities for recurring revenue
- Understanding the company’s position among its competitors and if there is a monopoly controlling a particular service or product segment
- Customer/client loyalty and satisfaction
- The management team’s reliance on the owner. (Is there a competent management team in place to take over operation should there be a need?)
To build the business value, focus on comparing the company’s growth potential against these trends. Also, hire an exit planning consultant to design robust valuation creation strategies to tackle the existing value gap, market competition, internal processes, etc.
Build a Strong Team
A competent team behind the business owner is never a bad idea. A skilled, strong team will not only drive the business towards success but will also help to create flexibility in exit planning. It will also open various exit paths, such as a management buy-out or an employee stock option.
A lack of vision and clarity about what the leadership team looks like to a prospective buyer also undermines the owner’s efforts. Since the owner has hired, trained, and supervised these people, it’s natural they will have complete faith in the team. However, they are unprepared for how a buyer sees the same people. The discrepancy between the buyer and the business owner about the team’s strength hurts the owner’s exit goals.
A management team that is not solid or capable hampers the exit success in multiple ways:
- Business owners face difficulty growing the company and securing the best price at the exit.
- Buyers get the upper hand if the leadership team is incompetent and drive the bargain in their favor.
- Owners have the additional task of ensuring that their team of people can run the business, which means their involvement in day-to-day operations is extensive.
- If the exit strategy is to pass company ownership within the family or sell internally to another partner, the absence of a strong team can dampen future prospects of business success.
- The owner’s business legacy goals will be jeopardized without a strong team behind them.
An exit strategy allows business owners to build and restructure businesses with a defined goal as the targeted objective. This way, when the time comes, they can exit the business gracefully and profitably on their terms.
An exit plan is mandatory since it:
- Gives the owner a framework for future business success
- Gives periodic insight on company growth
- Ensures a smooth transition for the management team, employees, and stakeholders
- Builds and enhances the business value
- Takes advantage of sudden market opportunities
- Prepares you emotionally and mentally for the eventual transition.