Ancillary issues emerge over time in every business, but many consultants fail to look beyond them. They try to fix the problems without understanding the underlying circumstances that cause those problems. Instead, they should first understand the whole business, then relate it to the client’s situation and current and future needs to help clients create transferrable value for the company and exit the business.
Value advisors, wealth managers, and business valuation experts spend time discussing exit planning and strategy for value acceleration, but can they provide valuable information and expert insight when it comes to the “business” value? Business owners also go through their challenges while planning an exit from their business.
Let’s understand this owner’s challenges better.
Challenge #1: Personal Attachment
Most business owners are overly attached to their businesses and do not want to exit them willingly. And understandably so: their companies/businesses are their “babies.” This personal attachment stops them from breaking free to build a life beyond business. Lack of time also prevents them from envisioning their post-exit future.
Challenge #2: Procrastination
Most business owners neither choose the time nor terms of their exit. Reasons vary from death, disability, financial distress, disagreement (in partnerships), and divorce. The COVID-19 pandemic has given us a sixth reason, disease.
Most owners are busy with day-to-day tasks, ensuring their businesses run smoothly. Therefore, it’s no surprise that exit planning is not topmost in their thoughts because they still believe that exit planning is an event that will occur in the far future and that they have plenty of time. But if we look more closely, a question arises: if half of the exits are not voluntary, then why are business owners so ill-prepared? Why do they fail to allocate more time to exit planning?
A value advisor’s primary goal should be to facilitate a shift in mindset and educate business owners on the benefits and importance of being prepared to exit the business.
Challenge #3: Attitude
There are two types of business owners: lifestyle business owners and value creation business owners. When we talk about lifestyle businesses, the founders’ primary goal in building their businesses is to sustain their current lifestyles. On the other hand, value creation businesses focus on creating value for customers, employees, owners, and investors. These company owners prioritize maximizing business value by using capital and talent in the best possible manner.
According to another survey conducted by Exit Planning Institute, two-thirds of business owners do not have any information about their exit options, 78% of business owners do not have a transition team, 83% of business owners do not have a written transition plan, and, shockingly, almost 49% of business owners have no exit plan at all.
The above findings indicate that most business owners are unprepared when it comes to exiting their businesses. Since planning for a successful transition and value creation takes time, the advisor must be responsive, reactive, and proactive to their needs.
The Value Advisor’s Responsibility
Ideally, business owners should see a clear value proposition that includes assessing the estate’s value and their needs for the transition. Sadly and surprisingly, most advisors are too timid about discussing enterprise value. When value advisors talk to owners, they focus on increasing revenue or suggest cost reductions to meet future financial goals. They fail to take the conversation one more step to address the impact of exit planning on enterprise value. Other advisors only address one dimension: the value of the personal estate and the owner’s post-retirement needs, or they talk about the business’s current value and how to grow the business.
The best advisors address both dimensions early and often. They understand that their client’s personal and business needs (both in current and future times), so they assess the value of the estate and the needs of the individuals, then inform their client about enterprise value and what is needed for a successful transition.
Successful Transition: A 3-Step Process
The first step is to maximize transferable business value. The business owner works with the valued advisor to implement a plan that directly focuses on the business. This is a long-term strategy; its results are not immediately visible but manifest over five to seven years when the actual exit happens.
The second step focuses on the business owner’s finances and wealth, which will help them exit. It involves creating a retirement planning model to find the net-of-tax proceeds needed to exit while fulfilling the owner’s personal goals.
At this stage, the owner can determine whether there is a value gap. If so, the business owner can reassess the strategy to ensure the net-of-tax proceeds are sufficient.
The third step checks the business owner’s personal readiness to exit the business. Surprisingly, 75% of business owners regret the decision to sell their business merely a year after they exit. When advisors focus on the business owner’s readiness, they should consider practical and emotional factors that might lead to regret after the exit. Since 30% of family-owned businesses transfer to the second generation, the advisor can effectively tackle family disputes and prepare the next-of-kin for takeover.
Value advisors and business owners should focus on a thorough valuation and financial plan. One way to do this is by applying a set framework to help achieve the end objective: a successful exit that meets all the business owner’s needs. This can only happen when the advisor gets more granular on value conversation. They should address the following questions:
- Does the current enterprise value satisfy the owner’s needs? If not, how much more is necessary for a successful transition?
- What are the advisor’s insights, considering the assumptions?
- Are you ready with more suggestions in case those insights change?
- How often can we review the outcome?
By applying a framework such as The Exit Planning Framework 2.0, advisors can define and measure the problem, analyze, improve, reassess, and facilitate a smooth exit.
