Why Exit Planning Should Be the First, Not Last, Thing on Your Mind

exit planning Mar 20, 2022

“This is my company. It will be mine forever.”

 

One of the hardest conversations to initiate with a business owner is about that point in the future when their company is no longer theirs. It’s a well-known fact that none of us will be on this earth forever. Therefore, the company we own today will at some point have to be either closed or transitioned to another party. Yet, many business owners become defensive at the mere mention of words such as “exit,” “sale,” or “ownership transfer,” abruptly closing down any further dialogue. 

Having to part with our company is not a subject many of us enjoy contemplating. The thought of it seems to stir up fears–perhaps fears of our own mortality, failure, making irreversible mistakes, loss of personal identity post-sale, etc. That’s why talking with business owners about their (ideal) “end game” is not always as rational a conversation as it should be. As one of the most striking examples I have encountered, I recently nudged one of my LinkedIn contacts to start thinking about business value in preparation for a rewarding exit down the road. His response was, “I’m not interested in selling. This is my company. It will be mine forever.” 

It was partially an emotional reaction, more emphatic than others I have seen, though not atypical. Caught up in his emotions, he completely misunderstood: I didn’t encourage him to sell nor did I suggest that I may be interested in buying his company. (I really wasn’t!) My point in these conversations is, 100% of all businesses, small and large, will ultimately change hands or be dissolved. That raises the central question any business owner needs to answer:

Should we let transition of business ownership happen to us, or take control of it early enough to achieve the outcomes we want and deserve?

 

When Disaster Strikes

Let me share a personal story with you. My wife and I do not have children. But over the years, we have had several pets. They all became family and in some ways we feel like they are our children. Several weeks ago, seemingly out of nowhere, Max, one of our cats started acting strangely in the evening. He has been very healthy and energetic even though he is 16 years old. So we took him to Dr. Sal, our vet, the next day, thinking he will just need a bit of medication for his sensitive stomach. When he first saw Max, even Dr. Sal didn’t think anything serious was wrong with him. But as he kept touching Max’s body and examining his organs, Dr. Sal’s facial expressions slowly changed to show signs of concern. “Max seems fine,” Dr. Sal said, “but something isn’t right here. We should do a quick x-ray.” When he brought Max back to the treatment room, Dr. Sal had a somber look on his face. Our hearts sank. “I’m sorry to tell you, but Max has a big tumor on his liver.” The tumor turned out to be inoperable. In just a few minutes and without any prior warning signs, our lives suddenly changed. We thought that Max will be ours forever. And in a spiritual sense, he will be; physically, however, he will depart us in the very near future.



How the Bubble May Burst

Most of us go through life “in a bubble,” as it were. We stay optimistic, choosing not to think about worst-case scenarios. Entrepreneurs in particular have to be positive in order to build something out of nothing and to provide a vision others will follow. Very few of us pause to ponder what existential threats to our physical and financial wellbeing may be lurking on our path and how to prepare for them in a timely fashion.

Though as entrepreneurs we may struggle envisioning a future without us at the helm of our companies, there are a variety of factors that can lead to a premature change of business ownership. These include life-changing personal events such as divorce, serious illness, death, spouse finding employment in another state, a major business partner leaving, and bankruptcy, among others. 

In addition to these “push factors,” there are also “pull factors,” developments that may entice us to give up our companies earlier than we anticipated. These include a new and better (business or life) opportunity on the horizon that can’t be realized until company ownership is transitioned; or an unexpected and attractive offer from a prospective buyer to acquire the company.

Moreover, as witnessed over the past two years especially, there can be larger-than-life societal and economic developments, including a precipitous downturn in a particular industry, that may make business ownership less attractive, to say the least. 

And, lastly, after owning their companies for long periods of time, many entrepreneurs simply get bored and lose interest in their own company! What once started as a passion project and then became a booming business to be owned “forever” is slowly turning into a burden on the owner.

 

Preparation is Key for a Happy Exit

What are you going to do when these challenges and opportunities sneak up on you? Whether you are forced to give up ownership of your company, or cannot wait to get rid of it because you found a bigger and better opportunity to pursue, transitioning your company on your own terms will require a significant amount of preparation. For negotiation purposes, not only should you have a clear understanding of your company’s fair market value, but you will want to have thought through what happens post-sale to all the people who have helped build your company all these years–especially your employees, vendors, and customers. To ease ownership transition, are you willing to stay involved in your company in any capacity? For how long? At what level of compensation? Will your management team want to stay and work for the new owner? Are you willing to agree to owner financing to any extent? The list of questions is extensive. Not knowing the answers well in advance can make the difference between a personally and financially disastrous outcome and a Happy Exit.

 

Take It One Step at a Time, But Start Today!

It can get quite overwhelming to gain mental clarity about all these issues. This is another reason why many entrepreneurs avoid the topic altogether or start thinking about it only when it is too late already. The best time to begin the planning process is the day when you launch or acquire a new company. The second best time is today. Then, with the proper guidance, proceed systematically, checking items off your list one at a time. You will thank yourself later.

In my next article, I will introduce you to three free tools that will put you in the strongest possible position to one day exit your company relieved, happy, and proud of what you have achieved.

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