The Business Owner’s Exit Plan: What’s Missing?

There’s a statistic from the Exit Planning Institute (EPI’s) State of Owner Readiness report , illustrating that only around 20 percent of businesses that go to market will be sold. What’s worse is that just about four percent of companies that are able to be sold do so without concessions by the owner. When you consider that many business owners have as much as 80 percent of their net worth tied to their business, the situation seems all the more desperate.

It’s difficult to see how precarious the situation really is while you’re living through the business. What do I mean? Well, many business owners use the business to supplement their lifestyles. It isn’t uncommon for owners to pay for their phones, WiFi, and even vacations and entertainment through the business. As long as the business is operating, you’re generating a nice income. But what happens when you no longer have the business?

Of course, your regular stream of income ceases to exist. But you will also be faced with the reality that life outside of your business costs more than you may have thought. Suddenly, you’re personally on the hook for your monthly phone bills, utilities, and perhaps even vehicle payments. These are things many business owners take for granted while they’re still in the business.

All of this demonstrates the incredible importance of proper exit planning. From the moment you begin your business, you should be working toward your exit. But there are often holes in the exit plan that business owners miss. So, what’s missing?

Who Are You Designing Your Company For?

Many times, business owners plan to sell their companies without truly thinking about who the buyer is or what they will be looking for. Now, it’s possible to make your business attractive without knowing who you’re eventually going to sell to. But, much like in marketing, knowing exactly who your target persona is will help you to put a fine tip on the organization’s design.?

For example, if you own a sporting goods store, it’s probably not a good idea to focus on making it attractive to buyers in the FinTech industry. Instead, you would grow and improve the organization to prepare it for a transfer within the retail sector, and likely, to someone who has knowledge and experience in sporting goods.

Therefore, you must identify your ideal buyer and incorporate that into your succession planning. If you intend to sell the business to a family member, you must be prepared for the possibility that you won’t immediately receive the full sale price. Similarly, you must plan for how you’ll transfer the business and the unique tax risks that come with different types of transfer.?

There are different risks associated with each type of sale. That’s true whether you’re selling to a family member, an employee, or to a buyer on the open market. Know what your plan is and prepare for every step of the process.

Owner Readiness

You might think, “Justin, when I put the business on the market, I’m going to be ready to sell!” That may be true. However, owner readiness is about more than “being ready to sell.” There are emotional and financial implications to consider.

A 2017 study by researchers at Aalto University in Finland discovered that entrepreneurs develop an attachment to their businesses that rivals the emotional bond parents feel with their children. This explains why so many business owners feel such a profound sense of loss after selling their organizations. It’s part of the reason the EPI reports that more than 75 percent of business owners regret selling their companies. So, what can you do to prepare for the emotional fallout?

Having a plan for what you will do with your time after selling the business is a good start. If you’re goal-oriented, you may choose to complete projects around the house or earn a certificate in a new field. Other people may find fulfillment in traveling the world. Whatever your post-entrepreneurial dream may be, having something to look forward to once the ink has dried will go a long way in keeping your emotions at bay.

However, owner readiness also applies to your personal finances. With just around four percent of business sales occurring without major concessions by the owner, you must plan for the possibility that you won’t receive as much as you think you will. Diversifying your income outside of your business can help mitigate the effect your final sale price has on your wealth gap .?

Although it can be tempting to reinvest all of your profits back into your business, doing so is like gambling with your future. Once again, you can’t count on receiving what you believe your business to be worth (or even selling at all). Therefore, it’s a good idea to work with a CFP? and diversify outside of your business.

In Conclusion…

Exit planning is imperative for business owners. Regardless of your long-term plans for the company, at some point, you will have no choice but to exit. So, build your business with that in mind. However, even the best exit plans are prone to blind spots. Working with a Certified Exit Planning Advisor or business coach can help you to identify your blind spots.?

Work with your advisor to review your plan and try to poke holes in it. Chances are, you’re going to find a few. When you know where your blind spots are, you can work to improve them. So, ask yourself, “How attractive is my business? Am I ready? And finally, who am I going to sell to?”