Face it, it is inevitable, because we are all human…and mortal. At some point, we must exit the businesses we own and operate. However, talking about business exits or succession plans is about as popular as discussing life insurance, dental work, or colonoscopies. We all know we may need all of these things, but nobody likes to speak about them, at least not publicly.
I have been helping owners of privately-held and/or family-owned companies exit their businesses since 1990. Our clients include owners of office equipment dealerships, imaging supplies distributors and office products distributors, typically with annual revenues of $2 million to $100 million. Over the years, we have seen a common theme among the clients and prospects with whom we have met: A Failure to Plan is a Plan for Failure.
For most business owners, the rigor of running their businesses on a day-to-day basis leaves them little time to ponder or plan for their eventual exit from the business. Too often, business owners say, “When I am ready to retire, then I will think about how to exit my business or develop my succession plan.”
Unfortunately, if you wait until you are ready to exit to plan your exit, it may be too late…or you may leave a lot of money on the table.
FIND THE EXIT BEFORE YOU ENTER
Many of us own stocks and bonds. As we monitor our investments, we usually have a plan which says, “If this stock reaches a certain price, I am going to sell all or part of my holding.” We have these plans in place to minimize our risk as well as to help secure a reasonable return on our investment. Yet most business owners have no plan at all for how to treat their investments in their own businesses.
We spend a fair amount of time working with Private Equity Groups and other financial investors. These are companies who have raised capital specifically to acquire and invest in privately held businesses like yours. All of these groups have an idea of how and when they will exit their holdings…before they even make the acquisition! As business owners, we can all learn a lesson from our friends in the Private Equity community and do a better job of planning our own exits.
BRUTAL STATISTICS
Let’s look at some cold, hard, and sometimes cruel facts regarding planning an exit from your business:
· More than 90% of owners of privately-held businesses said their preferred exit plan was to transfer their businesses to their heirs or employees.
· However, of those business owners, less than 20% had any plans in place to help their heirs or employees fund the purchase of the business from them.
· Less than 75% of owners of privately-held businesses have any type of formal exit or succession plan in place.
· More than 60% of owners of privately held businesses who sold or transferred their business without a formal exit or succession plans in place were disappointed with the results of their sale/transfer.
· Less than 30% of businesses survive a transfer to the 2nd generation of family owners.
· Less than 10% of businesses survive a transfer to the 3rd generation of family owners.
The common thread here is most of us want to transfer the business to our kids or employees, but we have no idea how to fund the transfer and most of the transfers fail anyway. Not a very pretty picture.
HOW TO AVOID THE TRAP
How do you prevent this from happening to you? The first step is to start thinking about how and when you would like to exit your business. But, don’t just think about your goals and aspirations, write them down! Studies have shown if we do not write something down, it isn’t “real” to us.
The second step is to work with your advisors (attorney, accountant, wealth/financial planner, investment banker/intermediary/business broker) to determine the best plan to accomplish your goals.
For example, we recently helped our client (a distributor of imaging supplies) with his exit plan. He met with us in 2011 and said, “I would like to sell my business but I am not ready to retire. Is this something we can accomplish?” We put a plan in place for our client which included a few things he needed to accomplish with the business before we could enter the market to seek a Private Equity partner. We entered the market in mid-2013 and completed the transaction early this year. Our client has a great new partner who will help him continue to grow his business and help him exit once and for all in four to five years. Plus, his bank account is much fatter now.
In my article for next month’s ENX, I will outline for you the “Six Ways to Exit Your Business,” where we will go over in detail the different ways for you to exit. In articles in the coming months, we will cover and discuss the following topics: How To Sell Your Business; 10 Biggest Mistakes Business Buyers Make; 10 Biggest Mistakes Business Owners Make in Exits; What Is The Best Type of Buyer For Your Business; ESOPs: Do They Make Sense For Your Business; Hurdles to Exiting an Office Equipment Dealership; and more.
The focus of these articles is to help you, the owner of a privately-held business, consider your options as you plan for your eventual exit from the business. No matter how young or old you are, it is never too soon to start planning how you will exit your business. Remember, the longest journey starts with one small step. Take your first step and start thinking about how and when you want to exit.
