In general, business owners feel comfortable being owners. They know what they are doing, feel confident in their role, and enjoy what their jobs. They know they need to change their roles in their businesses eventually, but they may not be prepared for the transition that is coming. Many owners resist planning their exits from their companies, but not necessarily for rational or practical reasons. They resist exit planning because they let their emotions affect their decision making process.
Let’s take an example of a 50-year-old business owner. He owns a manufacturing company and enjoys managing it. Retirement is somewhere on his mind; he knows he will need to start preparing for it at some point. He believes his business to be worth about $5 million and assumes that he and his wife can live comfortably on that and still help their families. A business appraisal from a professional reveals that his company is worth less than he thought – $3.5 million.
He may take initial steps and even talk to an exit planning advisor who could give him practical strategies to put into place. These strategies would increase the value of his company and put policies and procedures into place in order to limit owner dependence. He may intend to train a management team and scale back how much time he spends working in a hands-on way. Many owners have good intentions, but since they like working and enjoy being a part of a profitable business (especially in a good economy), they let things slide and procrastinate on exit planning, rationalizing that they are too busy working to prepare for an end date “down the line.”
Ten years “down the line” this owner may be ready to sell his business. He may want to spend more of his time on other priorities. He may be less enthusiastic about solving problems all the time. Confident in his ability to do deals, he decides to sell his business on his own without an exit planning advisor or a team of professionals. The problem is, he hasn’t addressed any of the weaknesses of his company. This will be apparent to any buyer. They will quickly notice how much the company depends on him being on site and in a management role. The company may be worth more because of its success over the years, but without his leadership and management, it’s only worth a fraction of its appraisal value to a buyer.
This owner needs to be willing to look at his company objectively, put his pride and his emotions aside, and view it as a buyer would. Because he did not prepare ahead of time and didn’t want to involve experts, he will now have to make concessions in order to pull enough value out of the business to retire on. This may include working for a period of time for the new owner under the new owner’s rules. If he lets his pride and his emotions control his responses during negotiations, he may have buyers offer less or not make offers at all.
An exit planner is valuable not just as a strategist during the exit planning process, but he can also be a guide during negotiations to make sure everything goes as smoothly as possible. For any owner invested in his business, leaving will be emotional. It’s vital to not let those emotions influence decision making, however, or the end result could be losing money and/or working beyond a set retirement date to ensure a fully funded retirement.
Don’t let your emotions lead you astray. If you’d like to discuss the emotional and practical aspects of your business exit, contact us today.
The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial advisor. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial advisor. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.
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Any examples provided are hypothetical and for illustrative purposes only. Examples include fictitious names and do not represent any particular person or entity.