The difficulty of planning for an exit from your business
When we start a business, we usually have two key financial objectives. The first objective is to generate a regular income, such as a weekly wage. The second is to build wealth in the business, which is effectively locked away until we sell our business. Unfortunately, most owners don’t plan for or undertake the measures necessary to access their wealth when it comes time to leave their business. In today’s Exit To Success blog, we explore the issue of planning for your business exit.
My Friend Louise
Recently I ran into my family friend Louise, who until recently had worked from home in her own research business. She enthusiastically told me that, since her youngest child was settled at school, she had needed a change from working by herself and joined a recruitment company in the city. Louise told me that she loved her new team environment and the company of others.
Then I asked Louise about her own business, the one she had worked hard building for six years. She told me that she had moved on from it, and was just happy to start the next phase of her professional life. After further discussion, it became clear that within her business there were 6 to 8 major clients who generated 90% of her revenue. She also happened to know another great researcher whom she admired from a professional perspective.
It became clear to me that Louise had missed her opportunity to unlock value from her business. She could have created a win/ win / win situation by championing this admired researcher colleague to her clients in exchange for a percentage of revenue for a fixed period. Her researcher friend would have benefited from some great new clients, her loyal clients would have benefitted from continued excellent research services, and Louise would have unlocked some wealth from her efforts in building her business.
Damning Business Exit Statistics
When you look at the statistics regarding business owners and their exit planning process, it’s hard to understand why most owners don’t plan for their business exit. In fact, most owners seem to approach this task with about as much enthusiasm as having a hernia operation.
A recent survey from St George’s Bank of 1,000 small business owners from around Australia found that more than half (54 per cent) had made no plans about how to exit their business and more than half (55 per cent) believed that they will not will not have enough funds to retire on.
These statistics are interrelated. Without an exit plan, an owner will not maximise his business wealth on leaving his business – and this will negatively impact the funds available for retirement. Despite these consequences, the vast majority of business owners continue to postpone exit planning. And by doing so, they run a serious risk of not getting the best price, the best terms or a suitable buyer to see value in their brand.
Reasons Why Business Owners Fail To Plan
Often when I ask business owners why they haven’t planned to sell their business, they usually list cost and complexity as reasons for not taking action. These reasons have some merit, as a good exit plan may involve several professionals whose advice must be carefully coordinated. There are also often complex personal matters (not to mention operational issues) which need to be sorted through to make the business attractive to buyers. These issues will likely have some financial, taxation, legal and insurance requirements to address.
The core reason for failing to plan lies elsewhere, however. Put simply, many business owners are not ready to develop an exit strategy. And until they are, they will put off the costly and complex task of exit planning. The decision to tackle exiting one’s business is fuelled by motivation which comes from a clarity and desire to transition to the next phase of life. Owners with a clear vision of life post-business are more likely to engage in exit planning activities. Their motivation comes from starting life anew, with exit planning the key to achieving their future goals.
Personal Transition Plans
I work with business owners to develop their motivation for the future via a Personal Transitional Plan. This plan gives the owner an opportunity to chart a new course, to imagine their lives in a different light. It opens up the possibility of embracing new sources of fulfilment by plotting the steps required to achieve a new active life. Once you are invested in a future after business, you will naturally become fully committed to undertaking and executing a business exit plan.
A business sale can be both overwhelming and complex. It can be doubly so if you don’t take your emotional response to a life-change into account. Don’t neglect your personal needs when you sell your business – they are the key to your long term happiness.