Every business owner knows they will eventually exit their current business. However, they usually only have a vague idea of what that exit will look like. Some owners want to extract value from the business; so, they can retire or simply move onto something new and different. Other owners want to leave a legacy and have a family member or key employee succeed them.
Most have the sentiment that they’ll sell, or turnover, their business when the time is right. Unfortunately, successful transitions aren’t guaranteed. Over 70% of businesses fail to sell. Only 30% closely held and family businesses survive the second generation, with only 12% lasting through the third generation. The number one reason a business fails to successfully transition is because the owner failed to plan their exit.
Without a comprehensive exit plan in place a business could fail to properly transition due to both anticipatable events; like, owner sells the business, key stakeholder, or key employee retirement, and unanticipatable events. Over 50% of business exits are due to unanticipated events; like, death or incapacitation of the owner or other key stakeholder, divorce, disagreements, or some other type of catastrophic distress.
Even though the vast majority of a business owner’s wealth is often locked up in their business, exit planning tends to not be a priority and is often simply put at the bottom of the to do list. Where it remains, until they’ve decided it’s the “right time” to leave the business. Unfortunately, while the owner may be ready to exit the business their business is likely not properly prepared to support their exit.
What are the tax implications? Will the exit be stymied due to a lack of consensus between stakeholders? Is management prepared to pick up the baton and move the business forward? Do your heirs want to take over the business? Are they properly trained, with the right experience to succeed? If not, who will lead the business? How will the business retain customers, suppliers, and employees once the founder / owner is gone? Is the business, in its current state, attractive to potential buyers? Can the business weather a prospective buyer’s due diligence review? Is the current valuation of the business accurate? Does the current net cashflow support the chosen exit strategy?
Start Your Exit Plan Now
Business exits often fail owner expectations because of a lack of time, planning, and preparation. Depending on the size, scope and complexity of the business it could take several years to develop and implement a comprehensive exit plan that can successfully support an owner’s exit.
Practically speaking the best time to start planning your exit from the business is at the beginning, when you’re first starting out. This way the exit plan can be adjusted over time as both personal and business circumstances change.
Understandably, the last thing on most business owners’ mind at the start is the exit. But it will happen. Whether it’s tomorrow, next year or ten years from now, you will eventually leave your business. It will happen.
What’s the old saying, “The best time to plant a tree was twenty years ago. The second-best time is now.”
If you don’t have an exit plan in place, it’s not too late. Here are a few reasons why you should start your exit planning as early as possible.
Time to Create a Good Exit Plan
An exit plan is a blueprint for leaving your business. It describes what a successful transition looks like. It also provides the steps that need to be taken and the tactics used to achieve a successful outcome.
Developing a good exit plan depends on the analysis of the owner’s personal and financial goals and the analysis of the businesses current valuation, financial position, tax obligations, legal foundations and issues, and overall performance.
It takes time to understand the current state of the business, and whether or not it supports the exit strategy. And if not, then what needs to be done to improve the business to a point where it can support the owners transition.
Time to Prepare Your Business
An important part of the exit planning process is making sure the business is prepared early enough in the exit planning process that business remains viable, operations are not disrupted, and the overall transition is smooth.
Will the business succeed without you? Is the business dependent on you for its growth and success? Are you the brand? To what degree are key customer, vendor and manufacturer relationships reliant on you? Will key employees and management stay after you leave?
It takes time and planning to mentor, train and delegate management and employees so you can step back from the day-to-day operations of the business.
The less the business is reliant on the owner for its continued viability and growth the more transferable it is. The more transferable it is the easier it will be to exit on your own terms and in your own time frame.
Time to Make the Business Attractive
The entire exit plan rests on the idea that the business is attractive at a valuation that supports the owners exit, whether that looks like a single payout from a sale, payments over time or a combination of the two. Even if the business is successful, if it does not generate enough revenue to justify the exit cost, it will be less attractive to a buyer.
Monetary value is only one aspect of how attractive a business is. Most outside buyers want to buy a business, not a job. The business may have good revenue streams diversified across multiple customers, but if it is structured in a way that it depends heavily on the owner, then it is a job and won’t be as attractive.
How about under the hood? Are the proper contracts in place with key employees, customers, and vendors. Are corporate records and foundational legal documentation in order. Are patents and trademarks properly filed and up to date? When was the last time a contract review was conducted? Are there any outstanding legal or permitting issues?
Time to Implement Plan
It will take far longer to implement the business exit plan than it did to develop it. A good exit plan takes about a year to create. On the flip side, it can take years to t grow the business to a point it can support your exit plan. How long that will take depends on where the business is now and where you need it to be for you to transition.
Training employees to take over the business can take an extended period of time as well.
What exit strategy you ultimately use can impact time to implementation as well. Transferring the business to an insider like an heir or an employee, when done right, can take several years to complete. An outright sale can take a year to complete as long as both the business and the owner are ready. An installment sale on the other hand will take much longer.
Final Thoughts
Stop putting off business exit planning. The best results take planning, preparation and most of all time.
You could decide that now is the “right time” to make your exit and push through a sale or transition the business to an heir or key employee. But, nine times out of ten the results will be less than ideal. You’re likely to only be able to extract a fraction of the value you would be able to if you had the time to properly plan the exit and prepare your business.