Personal expectations

Before deciding on the best way to exit a business, it is important to consider why you are transitioning. Some people will retire, some will take an extended vacation and some will re-enter the workforce as an employee. Some may buy another business or create a new one.

According to the Exit Planning Institute State of Owner Readiness Report (2017 Greater San Diego),

To successfully transition your business three things must be addressed by the owner:

1) the owner must focus on maximizing transferrable business value for as long as they hold the business while positioning it to successfully transfer upon exit so they can harvest wealth locked in the business;

2) the owner must prepare financially for a lifestyle without the income from the business; and

3) the owner must plan personally for what they will do (their third act) after exiting the business.

There are three common issues arise while addressing these goals:

1) The process of preparing a business to be sold and selling it is very time consuming. It is common for a business owner to try to do this alone while continuing their role in the day to day operations of the business. They take their eye off the ball and the business suffers, degrading the value of the business, often to the point where it become unsellable. 

2) Generally most business owners have 80-90 percent of their assets tied up in their business. The average selling price for a business with under $5 million in revenue is less than $300,000. Business owners have a hard time believing that "their baby" isn't worth more and the amount they can expect is less than what they need for a comfortable retirement.

3) It is very uncommon for a business owner to have a formal plan for what they want to do with their life after they transition from their business. This creates issues on multiple levels. You can learn more about this later, but the bottom line is that most business owners profoundly regret leaving their business once they have done so.

A Price Waterhouse Coopers study that found that 75% of business owners surveyed within one year of exit profoundly regretted the decision.

This was mainly for personal, not financial reasons. An owner’s identity is closely tied to his or her business. Losing that is the emotional equivalent of losing a loved one. Personal planning by the owner on “what’s next” it vital to a successful third and best act.

The there is the even bigger issue of whether or not the business will be able to be sold at all. Surveys conducted by the Exit Planning Institute (EPI), Price Waterhouse Coopers (PWC), the Alliance of Mergers and Acquisitions (AM&AA), Tom West, founder of Business Broker Press, and the Family Firm Institute (FFI), have determined that historical transition success rates are in the range of only 20-30% nationally.

The next big issue is that industries and businesses are subject to economic cycles and, at certain times, businesses will perform better or worse, depending on the business cycle.

A huge issue is that 63% of businesses in the United States are owned by Baby Boomers. This means that a lot of inventory will be coming to market in the next 10 to 15 years. So, you can expect that prices will be depressed and only those businesses who have positioned themselves to be attractive to investors will receive offers.

If you fail to plan, unless you have a great deal of luck on your side, it is a classic case of, "if you snooze, you loose".

Ideally, a business owner should sell when industry conditions are good but it is sometimes difficult to pick the top of the market. In many cases, industry cycles will be less important than the personal reasons for selling.

In some cases, an entrepreneur becomes burnt out, faces illness or is forced to exit a business for personal reasons. This can result in a sale needing to be completed by a certain date and/or at a reduced price, which is obviously not desirable. Like so many facets of business, the key to a successful sale or transition lies in careful planning.

According to BizBuySell.com's Q42108 Insight Report, the average business is on the market for approximately 6 months. So, you need to factor this into your exit plans.

ALSO You should Know: You Probably Won't Just Walk Away After the Sale

Most buyers will require the seller to have some involvement in the business after the sale to ensure the intellectual property, staff and customer loyalty are smoothly transitioned. If a buyer considers a handover period too narrow, the perceived risk increases and this will be reflected in the price on offer. It is important that the business owner(s) factor into their exit plans a possible 12-24 month earn out should the business be sold to a strategic investor.

1. All business owners will need to (one day) exit the business.
2. All business entities have some value (even if it is net assets) that can be sold or transferred to someone else.
3. Preparing in advance for this event will significantly increase the value that could be transferred.
4. Preparing in advance for this event will significantly increase the probability of a successful outcome.
5. A business built for exit (and maximum value) will be a better run business that will allow you to make more profit and reduce your stress.
6. Planning for exit means personally planning your finances and your ‘life after’ plan, which will result in improved personal wealth and happiness.
7. The value of a business can, in some cases, be over 80% of the business owner’s personal wealth. Therefore, we have a responsibility as a business owner to think carefully about this transition, for the sake of ourselves, the family, and other stakeholders.

The best way to exit the business is to start planning years before. In fact, you have about a 50:50 probability that you will exit your business due to death, disability, divorce, disagreement, or dissolution of your business arrangement.

You are best served if you have a contingency plan in place for these types of events. In fact, if you have not already created a plan, it should be a high priority to do so. 

And, there is always the possibility that you might receive an unsolicited offer for your business.

A friend of mine recently told me a story of a man he was doing some work for that sold his last company for $250 million. That sounded great until he finished the story by telling me that the investment group that bought the company turned around and sold the company two years later for $1 billion dollars.

Knowledge is power. As a business owner, you need to begin a learning journey. The more educated you are, the better your plan and the better the outcomes. 

You must understand the ‘why’ of your exit plan. The exit and succession plan for each business owner will be different for a myriad of reasons, including individual personal wealth and health circumstances, outlook on life, family circumstances and the type of the business.

Below are some typical transition pathways that include forced and non-forced exit events:

Leaving on Your Own Terms (Good)
• An offer ‘too good to refuse’ is made to buy the business.
• You transition into retirement.
• You transfer ownership to family members.
• You are offered a job or opportunity elsewhere and wants to move onto the next chapter of your life.
• You uses the sale as a means of reducing risk in your portfolio which typically occurs when a great percentage of your assets are tied up in your business.

Non-forced events (Bad)
• You have a lack of passion or motivation to continue.
• The business is causing you headaches and stress and you want to start a new chapter.
• The business model is breaking down and sales and profits are going south. You want out while the getting is good.
• You do not have access to enough capital or resources to scale your business.

Forced events
• The business is failing or even going into liquidation.
• Unexpected events such as marriage breakdown, death, sickness or disability.

If you plan for these events, you are going to have a far better chance of creating maximum value in the business and protect your personal interests and your wealth should an unforeseen event occur.

Some basic questions you should ask yourself:
• What would happen to your business if you died tomorrow?
• What percentage of your personal wealth does the
business make up?
• What is you potential return if you had a plan to increase your business value?

P.S. If you are not clear on your intent on what you want in life, then you need to be prepared to accept whatever you get. If you are clear on your intentions of what you hope to achieve in life, then you are much more likely to achieve the life of your dreams. Read on to explore this in more depth.