Ep #31: When It's Too Late: The Consequences of Not Planning Your Business Exit Strategy

Introduction

"Hey everybody welcome back to the podcast. So before we dive into this episode I want to walk you through a quick thought exercise. Let’s pretend that maybe you are right now, You’re in your office, you’re in your car, you are on a job site, it’s around noon right now so maybe you’re out to lunch, and you receive an email with the subject line “Acquisition Interest in Your Business”.

"An outside M&A firm is interested in learning more about your business to potentially buy it. Would you be ready to receive an unsolicited offer for someone to buy your business? Will you know if the offer reflects an accurate open market value of your company? If you accept it, will you be scrambling to figure out a legal strategy to protect your assets or putting together a last-minute tax planning strategy so you don’t get crushed in taxes?"

"This can turn out to be a recipe for disaster. You may only get one chance to sell your business. This will most likely be the most significant financial event of your life. The last thing you want is to be forced to turn away an offer because you didn’t have all of your ducks in a row. And in the end, you find out that it was the only offer you would ever receive."

What is exit planning?

"That is why today we are talking about the importance of starting the exit planning process early. Let’s first define Exit Planning. I talk about this throughout many if not all of the episodes on this podcast but for first-time listeners, Exit Planning can be achieved by developing a business transition plan that addresses three things, maximizing the value of your business, ensuring you are personally and financially prepared, and ensuring you have planned for the next act of your life."

"This is otherwise known as the three legs of the stool. Another way to view exit planning is growing your business in a manner that converts ownership into personal financial freedom and peace of mind."

"Many believe they can put off exit planning until they are ready to sell, whenever that is. Some of the most common reasons to kick the can down the road on starting the exit planning process are:

The assumption that when you’re ready to sell, a buyer will appear.

Many don’t understand the complexity of selling a business.

They don’t like thinking about retirement or mortality.

Many assume they will just pass the business down to their kids or their employees."

"One of the most common reasons is many think about their exit as an isolated event. You sell your business, get a check, and off to Hawaii you go. If it was only that easy! An exit is far from being just an event. It’s a process that can sometimes take up to two to three years while continuously being revised and updated. This is very similar to a Financial Plan, which is a living breathing document that is adjusted over time to changes that happen in your life. You sell or buy a house, start a retirement plan for your business, bring on a partner, get divorced, somebody passes away and you inherit assets, these are all life events that require changes to be made to your financial plan and your exit plan."

Consequences of delaying the exit planning process: Case Study

"So let me share a quick case study on what could happen if you decide to delay planning your exit strategy sooner than later."

"So we have John Smith and he has a goal to leave his business in 5 years by selling it for enough money to live comfortably post-exit. Yearly cash flow was around 1.4m, while the company had an estimated value of around 6,000,000. John’s salary of $500,000 came out of annual cash flow."

"John and his advisor had a plan to increase the business value, preserve its current value, and decrease taxes but never got around to creating an actual exit strategy."

"After five years John’s business had only changed for the worse. A recession had stunted cash flow and John started to get nervous about the idea of selling. Nothing was done to improve cash flow during the difficult times, as well as no systems have been updated or documented. His management team wasn’t restructured and if John were to leave his business, everyone in the company was so under-motivated there was no chance they would keep the company running after he was gone. John was faced with looking at another 5 years to get everything in shape for a potential sale."

"When you wait until there’s an offer on the table, there is no way to get that valuable time back. That’s why it's so critical to begin the planning process as early as possible."

The six reasons to start implementing exit planning today.

"So here are 6 reasons to start exit planning today:

"You’ll understand what the current value of your business is and if it’s sellable or not. If it does not have enough value or attractiveness for a potential sale, at least you are finding that out sooner than later. Because you now have two choices, you can make changes that increase the value of your business or you can leave things as is and make other plans to fund your retirement. At least you are not going at it blind anymore."

"The volatility and ups and downs of the market for buying and selling privately held companies won’t bother you as much anymore. When you have an exit plan in place, you give yourself the power to entertain offers when the M&A market is hot or maybe you receive an unsolicited offer a couple of years ahead of your actual transition goal. If you’ve been implementing exit planning, you will be in a position to take advantage of those unexpected opportunities. Sometimes a successful exit isn’t about when you’re ready, it’s about when the market is ready."

"You have leverage when negotiating the terms of the deal. Knowing what your company is worth and having realistic multiples in place supported by solid data gives you all the power when an offer comes to you. Now you can determine if it’s a poor offer or not and negotiate from a position of strength because you engaged the right professionals on your team and done your homework."

"You’ll have more options on how you want to exit. Maybe you don’t want to take all your chips off the table. Maybe you want to transition your business to your kids or a group of your employees. Planning this out can take years. You need to plan for tax implications, set up financing, and make sure your kids or team actually want to take over the business and that they have the skills to do so."

"You’ll get more money for your business. When you are proactive with exit planning, and fixing areas of your business to make it more efficient, it becomes stable and attractive to potential buyers and they will be willing to pay more for your company."

"Lastly, you’ll be prepared if the unexpected happens. I’m not talking about receiving an unsolicited offer, I’m talking about when unexpected life events occur. You have a health issue where you are physically or mentally incapable of working anymore. Who has the legal authority to take over and run the business? Who else knows how to maintain profitability and keep the doors open? Your exit strategy should include a succession and contingency plan to ensure the business continues to run smoothly god for bid if something happens to you."

Conclusion

"So I hope the big takeaway is to start exit planning sooner than later. You’ve been building your business for 10, 15, 20+ years. Position yourself to one day enjoy the fruits of your labor. You all make it a great day."