Four mistakes family business owners make with their exit plan
Have you ever seen someone walk unsuspectingly into a glass door? I’ve been that person. What’s the worst part? Knowing it was totally preventable.
While that scenario may be funny, creating and executing your exit plan is serious business. There are four common mistakes I see family business owners make in their exit plan — mistakes that create needless frustration, anxiety and regret. The good news is they are preventable.
Mistake No. 1: Waiting until you need to retire to start planning.
William Shakespeare nailed it when he said, “Better three hours too soon than a minute too late.”
When it comes to exit planning, many business owners start the process way too late. It’s not uncommon for a successful succession plan to take five or more years to complete. Why does it take so long? It involves a lot of components, and it’s critical they’re addressed properly in order to have a successful exit.
Some of these key components include: establishing the owner’s objectives; analyzing the owner’s personal financial needs; developing and nurturing the next generation (family or management) to take over the business; reducing owner involvement; running a sale or ownership transfer process; estate and tax planning; and legal planning.
You can see how this process can easily take years to complete, but how do you keep it from becoming overwhelming? Take it one step at a time. By starting early, you’ll have plenty of time to make thoughtful choices and decisions without feeling rushed in the process.
Mistake No. 2: Doing your planning in a vacuum.
Have you ever met a family business owner who thought their kids were set to take over the business when, come to find out near retirement, the kids wanted nothing to do with it?
A great way to ruin your exit plan is by not communicating your intentions and sharing your plans with anyone. Think of all the people who might be impacted by your exit planning; they all need to be in the loop for it to really work: you and your family, your management team, your employees, your customers, your suppliers and your community.
In addition to open communication, it’s important to be supported by a team of skilled professionals who have experience with exit planning. These advisors will be invaluable since they deal with issues on a daily basis that you will likely only go through once in your life. Your team might include attorneys, accountants, business valuation professionals, wealth planners, bankers, brokers, and counselors or an industrial psychologist.
By talking early and often to your key stakeholders and advisory team, you’ll be able to create a viable vision for an exit plan that will best serve all parties involved.
Mistake No. 3: Setting up the wrong exit strategy.
There are many ways to transition your business to a new owner. In fact, we commonly see business owners who are confused, unaware of, or overwhelmed by their options.
Instead of blindly selecting a strategy, a business owner should first look inward and ask, “What do I want?” This will help generate answers to critical questions such as:
- What are my objectives in this exit?
- What are my personal financial needs?
- How much do I care about legacy?
- Do I want my kids to take over the business?
- Do I need a quick transition or do I want to stay involved and slowly taper off?
After sorting out big items like these, the right exit strategy will start to become clear and you can move forward with confidence.
Mistake No. 4: Skipping the business valuation.
You wouldn’t expect your employees to keep contributing money to their 401(k) but not check the balance until they retire, would you? Yet that is exactly the type of behavior I see family business owners engage in when it comes to one of their biggest retirement assets: their business.
A business valuation will tell you how much your business is worth now. It also pays to get valuations performed regularly and to start doing them years before you want to exit your company. Here’s why:
- If your company’s value is significantly lower than you thought, you might have to put in a few more years to increase the value. Better to know sooner rather than later.
- I have had the pleasure of telling one family business the company was worth quite a bit more than they thought, and with that, early retirement became an option for the owner. How delightful!
- A valuation will give you insights about what drives business value up (or down) in the eyes of a buyer. Often times this is eye opening for the business owner and helps them better focus their efforts to maximize value.
- A valuation starts the document gathering required in a due diligence process, which is helpful if you’re going to sell the company (and a valuation is required for tax purposes if you are gifting equity).
If you don’t want your exit to become a cautionary tale, make sure you take the proper steps to prevent these common exit planning mistakes. Be sure to:
- Start your exit planning early.
- Talk with your stakeholders and advisory team about your exit plan and your intentions.
- Choose a specific exit strategy only after you’ve thought about what you want to happen after your exit.
- Get a business valuation periodically to improve your business performance and help you measure progress towards your exit goals.
Matt Rampe, ASA, is a senior manager in the Forensic, Valuation, Litigation Services Group of Beene Garter LLP. He regularly values family-owned businesses and helps them plan for successful transitions. He will co-lead a workshop Feb. 25 on picking the right exit strategy; learn more at bit.ly/exitseminar. Rampe can be contacted at email@example.com or (616) 235-2974.