Article 2 in our Exit Planning series
Successful exit planning focuses on two main objectives:
- Maximising your company’s value prior to your exit; and
- Ensuring that you accomplish all your business and personal objectives as part of the exit.
The personal aspect is a critical component of the overall strategy and is often overlooked. In An Introduction to Exit Planning we explained that 75% of business owners profoundly regret their exit 12 months later. For a variety of reasons life after work does not live up to the daily thrill of a life of work. This means that having a set plan for a life after business is just as important as making sure you get the best financial outcome from the exit.
Why you need a personal exit plan:
Sophisticated investors like venture capital firms and private equity groups never invest in a company without having a clearly defined exit plan in place. Business investors understand that having a clear and defined exit strategy helps to ensure they will capture the return on investment they are seeking – and fulfil what they need to embark on their next journey.
When it comes to selling your largest and most valuable asset, shouldn’t you have a similar plan? From our experience, there is no reason why the owner of a succesful business shouldn’t adopt the same mindset as the venture capitalist and we know that most owners won’t be happy after the sale if there is nothing to move on to. After decades of driving wealth, growth and opportunity, to wake up the next day without that sense of purpose or direction is confronting. Exiting a business that you have built is a huge milestone and impacts every aspect of your life.
What is involved?
When it comes to selling your largest and most valuable asset, shouldn’t you have a similar plan? From our experience, there is no reason why the owner of a succesful business shouldn’t adopt the same mindset as the venture capitalist and we know that most owners won’t be happy after the sale if there is nothing to move on to. After decades of driving wealth, growth and opportunity, to wake up the next day without that sense of purpose or direction is confronting. Exiting a business that you have built is a huge milestone and impacts every aspect of your life.
What is involved?
A departing owner should view their exit as the start of their next phase in life. This means aligning your personal, financial and business goals to make sure they can co-exist and work together to achieve your dream.
We’ve noticed that owners who achieve a successful exit see the sale as a means to an end - a transition to the next phase of their life. They have spent time and money getting educated on the process of how to transition out of the business. They have discussed transitioning with their loved ones and have spoken with financial advisors to incorporate it into their wealth management plan. Most importantly, they’ve considered and designed a life after exit.
Succession decisions should be compatible with a business owner’s personal goals and that will determine how you exit. We recommend that you follow a two-step process to determine which exit option is best for you. It’s important to speak with advisors as early as possible in the exit process to ensure your options are consistent with your personal goals and to consider the realities of your company in light of an exit.
Step One: Set Personal Goals
You need to identify your most important objectives; both in terms of financial goals and in terms of non-financial goals.
Financial goals require you to consider topics such as “how much money do I need from the exit to ensure my family’s financial security?” While non-financial goals consider topics like “I want the company to stay in my family," or "I want my key employees to be rewarded”
Establishing well defined and written goals is the first step in the exit planning process. By doing so in advance of your exit, you and your advisors are given the time necessary to make your goals a reality.
Step Two: Make Sure Goals are Consistent and Realistic
Owners need to determine whether their goals are consistent with each other. When doing this, it can be incredibly valuable to get input from an outside advisor. Very often we find that the personal and business goals are not consistent, or even contradictory. Dealing with this early on is paramount.
For example, many business owners want to receive all cash at closing when they exit their business. At the same time, the owner wants to transfer the business to a family member. Unfortunately, these two goals are rarely consistent. Family members and key employees often do not have sufficient capital to structure a transaction this way. A great deal of stress and frustration can be avoided if your goals are consistent.
For the 25% who have no regrets about exiting the business, it’s safe to assume that they were well prepared for a life after business. Entrepreneurs never sit still for long. The new challenge may well come in the shape of other business opportunities and if this is the desire, then these goals need to be established early on.
Something to consider
Personal goals need to account for the practicalities of living in the 21st century. Retiring at the magic number of 65 used to mean having a big enough pot to see you through the next 10 years. Not anymore – we are living longer. The average life expectancy has increased ten years for males and six years for females since the 1980s.
Personal goals need to account for the practicalities of living in the 21st century. Retiring at the magic number of 65 used to mean having a big enough pot to see you through the next 10 years. Not anymore – we are living longer. The average life expectancy has increased ten years for males and six years for females since the 1980s.
Data shows that only 5% of owners are happy with the net proceeds they received from selling their business. Will you and your family have adequate and sustainable income from dividends, residual income and individual retirement benefits to manage an acceptable lifestyle for the next 30 years?
Or whether by choice or circumstance, will you be one of the 80% of pre-retirees who expects to work in some capacity during their retirement. It doesn’t matter what your situation or choice is, what matters is that you have defined your goals, they’re consistent and realistic, and you know what to plan for.
Your exit plan is a comprehensive road map that addresses the personal, financial, and business aspects involved in selling a business. It is not a path we recommend travelling alone. A trusted advisor can help you understand how these are linked and why the personal aspect of the exit is where most owners come up shorthanded.
