When you’re running a successful business, creating a plan for your eventual exit may be the last thing on your mind.
“I have way too many responsibilities for that right now.”
“I’ll start thinking about that when I’m closer to retirement.”
“I’m in a good spot right now, so it’ll all end up being okay.”
Today, we’ll look at some common assumptions that business owners make about their exits, how those assumptions can set a successful business exit back, and show you why doing a best-case/worst-case thought experiment could help motivate you to begin planning for your inevitable business exit so you can position yourself to exit on your terms.
The Downsides of Waiting
It’s common for business owners to think that they can wait until they are ready to exit to begin planning their exit. This assumption is fraught with risks:
- The business may not be ready for your exit when you are ready to exit.
- Your business might not be worth enough to allow you to achieve financial security after you exit.
- Something outside of your control—such as a sudden death, incapacitation, divorce, or other personal issue—may force you to exit before you intend to.
The first assumption is one of the most common assumptions that advisors experience when discussing Exit Plans with business owners. In many cases, when business owners are ready to exit their business, they quickly realize that the business cannot function without them.
Whether a business owner makes all of the most important decisions, has all of the most important business relationships, or feels most comfortable having control over every element of the business, it becomes exceedingly difficult—if not impossible—for a business owner to exit a business on their terms when that business still relies on their presence to succeed.
The second assumption often ties in to the first assumption. Many business owners believe that their businesses are worth more than they really are. They might base this on rules of thumb, superficial comparisons to similar businesses, or simply wishful thinking. And oftentimes, those business owners don’t account for the fact that their business relies on them to succeed. In short, if that business owner were to leave the business, its value would drop precipitously.
The third assumption is one that most people don’t want to think about at all. Of course, most people don’t want to think about something horrible happening to them that prevents them from achieving all of their goals. However, business owners who ignore this possibility could be putting their businesses, their families, their employees, and other people who rely on them in peril.
Addressing Potential Business Exit Risks
There’s an old saying: “The best time to plant a tree was 30 years ago. The next best time is now.” The saying is similarly applicable to planning for your business exit.
Time is one of the most valuable commodities when planning, especially for planning a business exit. You will likely need time to position the business to run without you at the helm, install Value Drivers that support your financial security goal, and create backup plans for if something unexpected occurs.
Most crucially, creating an Exit Plan can help position you for success in both the short and long term.
For example, a key component of a successful Exit Plan is ensuring that the business can succeed even without you at the helm. This often requires you to find the right people who can run the business when you eventually leave it—whether temporarily or permanently, by choice or by chance.
In the course of doing so, you may discover that you have potential successors who exist within the business. This can have the short-term benefit of incentivizing those people to stay with the business while allowing you to focus less on everything and more on the things that you want to focus on.
Similarly, the most important goal of any Exit Plan is allowing you to exit the business with financial security, meaning that you’d never have to work a day in your life again if you didn’t want to. To achieve this goal, you need to do several things:
- Determine the amount of money you will need for financial security.
- Make your business attractive to potential buyers (whether family, insiders, or third parties).
- Incentivize your most important employees and managers to stay with the business after you leave it.
With enough time, an Exit Plan could help you do all of these things in pursuit of a business exit on your terms.
Best, Worse, Worst
As you think about your inevitable business exit, it might be useful to try doing a best/worse/worst-case thought experiment.
In a best-case scenario, you create an Exit Plan with your Advisor Team that allows you to pursue the goals most important to you on your terms. When things don’t go as planned, your advisors help you adjust to keep you on a path toward an exit on your terms. When everything is said and done, you exit your business when you want, sell it to exactly the person or people you wanted to sell to, and spend the rest of your life doing whatever you want.
In a worse-case scenario, you wait until you are ready to exit your business to start planning your exit. You find out that the business won’t be able to run without you at the helm for at least five years. During that extended five-year period, you find out that potential buyers will only purchase your business if you stay on as an employee for at least two years, because no one can do what you do. Now, not only did you have to stay with your business longer than you wanted but you also have to work for someone else to achieve financial security.
In a worst-case scenario, something out of your control removes you from the business entirely before you could achieve any of your goals. The people who worked for you and relied on you suffer because you’re no longer at the helm of the business and had no plan for its future without you.
Give Yourself Time
Every business owner, including you, eventually exits their business—by choice, death, or otherwise. Fortunately, you have control over how you will approach this inevitable exit.
Successful business exits take time, expertise, and flexibility. With a dedicated Advisor Team and a commitment to exit on your terms, you can better position yourself to achieve your goals with an Exit Plan compared to hoping that everything works out without one.
We strive to help business owners identify and prioritize their objectives with respect to their businesses, their employees, and their families. If you have questions on this topic, we can help with more information or a referral to another experienced professional.
About Altus Exit Strategies
David Jean is the Director of Altus Exit Strategies and a Principal at Albin, Randall & Bennett, where he is also the Practice Leader of the Succession Planning, Business Advisory, and Construction & Real Estate Services Teams. David works with business owners who want to improve their business’s value before they sell through the Seven-Step Exit Planning Preparation™ process. He has worked with companies from $5 million to $50 million in revenue across a range of industries.
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