The Seven Myths of Exit Planning
As a business owner, a good exit plan is crucial to profitably transferring ownership of your company. Yet, during conversations with hundreds of successful business owners, I have discovered some common misconceptions surround the exit process.
Myth #1: “I will just sell my business and retire.”
Fewer than 20 percent of businesses for sale actually sell, according to a study by the American Chamber of Commerce. Those that do sell to an outside party typically consist of companies that operate in a unique niche or location, or that go up for sale when the economy is growing. Most transactions in the construction industry are internal, with the majority of transfers consisting of management buyouts, employee stock ownership programs and some form of gifting.
Myth #2: “I will deal with my exit plan in five years.”
When I talk to a business owner about when he or she intends to retire, the answer is almost always “in five years.” Three years later, the answer is still “in five years.” Without a written exit plan in place, the procrastination continues. Even though the actual exit might take an additional five, 10 or 15 years to execute, having a strategy in place is critical to meeting post-exit financial goals. Furthermore, it takes time and training to align, grow and replace the owner with a formal succession process.
Myth #3: “I can probably do this myself.”
Sure, you know how to run your business, but have you ever exited a business? The Family Firm Institute reports that more than 70 percent of businesses fail to transfer to the second generation or an outside buyer. Ninety percent of businesses fail to transfer to the third generation, according to the institute. Translation: Your grandson has about a 3 percent chance of running the business you hope to transfer to your son or daughter. Those are not good odds. As a business owner, you have already had conversations with your accountant, lawyer and insurance agent; but the information is probably scattered. A professional consultant can formulate an exit plan that pulls all of your personal, business and financial goals together.
Myth #4: “My business is worth $7 million.”
The harsh reality is that your company value depends on who you are selling it to, and most owners overvalue their businesses. Advisors accredited in business appraisals can help you understand what makes your business valuable to an acquiring party and offer strategies for increasing that value.
Myth #5: “That will never happen to me.”
Death, divorce, disease, disability, departure. I get a call once a month regarding an owner’s untimely death or disability. In most cases, the buy-sell agreements are not aligned with the business owner’s motives or goals. Oftentimes, they are unfunded or make what should have been a non-taxable benefit, taxable. Some recent horror stories that I’ve seen: a buy-sell agreement that unintentionally created income tax for the business owner’s widow; a situation in which the widow―who never worked in the business―was demanding her husband’s office, position and salary; and an agreement that provided for a fixed amount to be paid out as a means of repurchasing the deceased owner’s interest. This agreement was created at the business’ inception, but several years later, the value of the business had grown exponentially. You can imagine the disputes that could have ensued. Creating an exit plan in cooperation with a professional consultant can help you avoid the unintended consequences of an outdated or poorly drafted agreement.
Myth #6: “If I could get $4 million, I would retire tomorrow.”
I know it sounds like a lot, but is that really how much you need? The real question you should ask yourself is, “How much do I need to replace my income?” While 70 percent of your wealth might lie in your business, you have to consider your money outside the business: savings, retirement funds, real estate income, investments, etc. You must be able to replace your income so you don’t outlive your money. Because so much is dependent on your exit, the planning process should coordinate business, personal and financial goals, resulting in a comprehensive plan that satisfies not only your post-exit financial needs, but also legacy planning and wealth protection goals.
Myth #7: “But my accountant does exit planning.”
You probably have a good accountant and a book value for your company, but it takes a proactive approach and a significant amount of other information to exit your business. The focus of your exit should be based on your business, personal and financial goals. Learn from my past company’s experience, for example. The 63-year-old specialty contracting company employed 200 employees. The team of owners invested six years and more than $250,000 for fragmented advice as we wandered down the exit path with two offers from industry roll-ups that were consolidating our space and two offers from boutique private equity firms that wanted to invest in our company. Additionally, we investigated an ESOP and used a management buyout to transfer the stock of three existing owners to five new owners. We received reactive advice from our advisory team but were still lost and had no direction. Exit planners can translate a business owner’s goals into a plan that allows him or her to meet their financial targets; install a successor; and protect his or her wealth.
Exit planning is the orchestration of many disciplines coordinated in one comprehensive report. After the exit plan is delivered, the next stage is a separate execution phase. An exit planner can also coordinate different disciplines and professional advisers, including attorneys, accountants, estate planners, insurance advisers, financial planners, business consultants and others involved in the execution of the exit plan. The key is to start planning today.