The Top 4 Reasons Business Owners Avoid Succession Planning

All business owners will eventually exit their business, you included. Whether it is expected or involuntary, your prior preparation for that final day will be essential. One of the key elements of that preparation, is financial security.

Despite the incredible importance of financial security, most business owners do nothing to prepare for or systematically move towards that goal. In our 20 plus years of advising business owners, we typically hear owners use these four excuses as reasons to postpone their succession or exit plan.

1. The business isn’t worth enough to meet my financial needs. When it is, I’ll think about leaving.
2. I don’t need to plan. When the business is ready, a buyer will find me.
3. This business is my life. I can’t imagine my life without it.
4. I will be required to work for a new owner for years.

Regardless of which excuse may be used to delay the inevitable, its important to maneuver these obstacles and take the initiative towards the next stage of your life.

Excuse 1: The Business Isn’t Worth Enough to Meet My Financial Needs. When it Is, I’ll Think About Leaving.
Most business owners think their business are worth more than what the market will pay. Instinctively, however, they don’t believe a buyer will pay them what they want. Too often the value they set in their mind is what the business owner thinks he needs to retire in style.

Mike Williams, a 55 year old business owner, dreamed of the day he could leave his company. Striving for success, Steve had spent the last five years watching every penny, shedding the excess weight in his company, and developing new market strategies all while maintaining a rigid budget. He worked hard despite hard times, confident his hard work would pay off.

Five years later, Mike had reached his 60th birthday, the benchmark he’d set for his retirement. Nothing had changed. He had remained stagnant, working hard, but doing nothing to prepare for this day. Now the day had come and Mike realized he had spent five years working in his business, but not a single moment working on his business. Mike had missed his opportunity to do the following:

Create personal exit goals and objectives.
• Use those goals to establish an exit plan that identified the most productive actions he could take to achieve what he valued in a tax efficient way.
• Increase business value to a place where he could sell, pay taxes, and exit with the amount of cash necessary to maintain financial security.

Most business owners understand that growing the value of their company takes deliberate and intentional action from the owner towards their goals, yet many fail to act upon this. This lack of action leads to the failure to create an exit plan, and prevents an owner from exiting on their own terms.

Do you have a plan?
Failure to plan not only affects your ability to exit your business with financial security, but it ignores the need for your company to grow in value efficiently and quickly in specifically targeted goal areas. Growth and protection of value is the core of exit planning. Identifying what areas require the majority of your time and money in order to make the greatest impact, is the key task in an exit plan. It is of equal importance as identifying strategies to minimize both current taxes, and those on the day you choose to transfer your company.

It makes sense to start planning your succession or exit now. You must plan for this if it is going to be successful. You must take consistent, purposeful action to implement a plan that encompasses all aspects and disciplines needed to accomplish a successful exit from your business. It’s a reality that most business owners fail to realize and prepare for, which ultimately holds them back from exiting their way, with all their goals met.

Excuse 2: When I’m Ready, a Buyer Will Find Me.

The Great Recession of 2008-2011 taught many hard lessons, one of which is that the timing of an exit relies completely on a healthy economy, active buyers, a business with good cash flow, and an owner who is ready to sell. Finding all these factors at precisely the right time is difficult and takes work.

Secondly, one buyer puts you at a significant disadvantage. With only a 20% success rate in selling a business, the likelihood of one buyer providing you the best value and terms is improbabe and naive on your part, in most cases. Investment Bankers provide a methodology to maximize value by engaging multiple buyers simultaneously thereby creating tension with the buyers and thus improving valuation and terms.

It is natural to expect some owners to want to wait until the economy shifts in a direction or the business to reach a higher level of profitability that is more favorable to them. However, this passive attitude presents immeasurable dangers:

What if the right buyer never shows up?

When the owner is ready to sell, what if:
• The M&A market is down and capital is expensive?
• The company’s industry niche has fallen out of favor?
• A national competitor moves into the owner’s territory?
• The business or economy has declined?
• The owner’s health/personal circumstances deteriorate?

What if the economy tide never shifts back the way it is expected to?

Excuse 3: This Business Is My Life. I Can’t Imagine My Life Without It.

Business owners who “retire on the job” or experience “burn-out” usually will drag the value of the business down with them. Too often, they leave the business “boots first” with their heirs left to untangle the mess. If not death, then it’s a health issue or it’s the owners unwillingness to invest capital into the business that puts them at a disadvantage in the market, again depressing business value. These are all symptoms of an owner who has not developed their identity outside of their ownership role.

For the owner that is actively engaged in their business, who is having a positive effect on their lives and the lives of others, should not exit just to exit. But those who have felt their passion fade, it’s time to act while there is still a chance.

Excuse 4: I Don’t Want to be an Employee to the New Owner.
One of the key components of a good exit plan is to develop the management team around the business owner so-as to minimize the importance of the owner. It is the business that does not need the owner that will capture more enterprise value simply because it reduces risk on behalf of the buyer. A good exit plan limits this objection up front.

Therefore, the best way for an owner to ensure they don’t become the employee of the future owner, is to make themselves and unnecessary expense. This is done by creating a management team that is proven and capable of achieving company goals, regardless of ownership.

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Waiting until the end is near to start an exit or succession plan fails to utilize the majority of exit planning benefits. Exit planning involves building business value, cash flow, and resiliency so that the business can remain successful regardless of who owns it. Protecting value and minimizing taxes are some of the primary focuses of an exit plan, and are valuable business strategies no matter what the owner’s specific exit goals are. When the time finally arrives, the owner who has spent time planning their exit will be better positioned to achieve their business and financial objectives.

Final Thoughts

The decision to sell the business that you grew and built is certainly a personal one. No one can tell you how to run your business or your life, as the choices are ultimately your own. Having worked with so many owners, we understand how to plan your exit in a way that achieves what you want most. Your personal and professional objectives are the starting place for an exit plan, and we are prepared to help guide you through the biggest financial decision of your life. All business owners exit their company one day, we want to ensure it’s done your way.

Call us today for a confidential and complimentary discussion on how to begin the next stage of your life.

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