In this episode, I discuss the top 3 exit planning mistakes business owners make when trying to leave and retire from the business.
- Not knowing the true value of the business
- Waiting too late to plan until being forced to sell
- Being too personally attached and involved in the business
I'll discuss each of these in more depth and how to avoid them. Enjoy!
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"Hey everybody today we are talking about the importance of having a business continuity plan. I will discuss what this is, why every business owner should have one, and what should be included in the business continuity plan document, so here we go... "
Exit Planning Mistake #1: Not Knowing the True Value of the Business
"The first mistake I see business owners make when Exit Planning is not knowing your business's worth. Now maybe you asked your CPA and they calculated your value based on retained earnings or you heard from a buddy who had a friend who sold a business for “x” amount of money so maybe you think you can sell for the same amount. Both cases are not reliable if you’re trying to plan in advance.
To keep it simple, your business value is your EBITDA, earnings before interest, taxes, depreciation, and amortization, times your multiple which equals your business value. Just know your EBITDA is your cash flow and for every business industry, there is a standard multiple that is used as a starting point. There’s a lot more that goes into this, but we’re keeping it simple.
Not knowing the value of your business or at least a range of value for your business opens the door to a lot of risk.
For example, most owners have most of their net worth tied up in their business and it’s the largest asset on their personal balance sheet but we don’t know how much it’s worth, and the majority of the time it’s illiquid.
Knowing the value of your business can help you in multiple ways.
First, it helps you determine and answer a really important question, if you were to transition and sell your business, would you meet your retirement funding goal?
Meaning would the net proceeds from the sale be enough after taxes, transaction costs, and legal fees to fund the next chapter of your life. Now don’t forget to include your outside investments, 401ks, SEP IRAs, or real estate you may own. That all will certainly help but in my experience, many owners are behind with how much they are saving and investing outside their business. Now if you have been doing this and you’ve been saving and investing for a long time, good for you, that’s awesome. But for the majority of us, we rely on our business to be our one-way ticket to retirement.
So without knowing the value of our business it’s very difficult to do the proper planning in advance and leaves you in the dark, wondering if you’re going to be okay when you sell the business and retire, and not knowing if you’ll run out of money or not in retirement.
Now if the value of your business does meet your retirement objectives, if you have saved and invested enough outside your business, it could be a good time to step away. So if you’ve been in business for 5 or more years, reach out to a broker, talk to a qualified CPA that specializes in valuations, and get something done.
Exit Planning Mistake #2: Waiting Too Late to Plan Your Business Transition
"Alright let’s move on to common mistake number 2, Which is waiting too late to plan until you must sell. Many wake up in their mid-60s, or early 70s and realize they are finally ready to step away and start planning their transition out of the business. They go get a valuation or speak with an Exit Planning Advisor, and find out they can’t get anything for their business. It’s either too late or very difficult at that point because of the lack of time and the amount of energy, mentally and physically, that’s needed to go into the process of building a saleable business. It will require hiring top talent, building systems and processes, having a documented sales process, and a lot of stuff, and many small business owners don’t want to do it at that point in their life.
Many who delay the exit planning process, expose themselves to a potential forced exit from their business. Over 50% of business exits are involuntary due to one of the Five D’s. Death, Divorce, Disability, Distress, and Disagreement. All of these are dramatic life events that usually happen unexpectedly and can force an owner to exit. So begin with the end in mind and start planning much sooner than later, so if something does come up, you, your family, and your business will be protected because you have a plan.
Exit Planning Mistake #3: Becoming Too Personally Attached and Involved in the Business
"The third common mistake is the owner is too personally attached and involved in the business. Every decision needs to be made or confirmed by you…. all customer questions are brought to you…. you are the leading salesperson or perhaps the only salesperson in your organization. Often we like it this way because we have all of the control. There’s that voice we tell ourselves that nobody can do this better than I can. And it gets to the point where sometimes we can’t get out of our way.
More often than not the bottleneck in our business is us as the owner. And what happens is we don’t have a life outside of our business. The business becomes our identity and without planning we don’t give ourselves enough time to articulate our goals and passions separate from our business. So what happens is an owner will go through the entire due diligence process of a sale, and when it comes to the table to sign the official document, they can’t do it and walk away. Why, because they don’t know what they’re going to do next after they leave.
To prevent this from happening, even if you have no intention of leaving your business anytime soon, start mapping out your end game. What would your life after business, plan be? Spending more time with family, grandkids, travel, start a non-profit, could be anything, but the sooner you start thinking about that, the better and more likely you will have a successful transition out of your business. "