Ep #090: 10 Critical Areas Impacted By Your Business Exit

The Importance of Exit Planning for Business Owners

Surveys and studies consistently reveal a startling truth: most small to mid-sized business owners lack a concrete exit plan. My own experience doing this for close to 15 years confirms this; too often, owners are caught up in the day-to-day operations and excitement to grow that they overlook the eventual necessity of their exit.

Without a solid exit plan, it becomes a situation that not only affects you as the business owner but can ripple out and affect everything around you that you’ve built. Let’s discuss the ten critical areas impacted by exiting your business to understand how vital planning for this once-in-a-lifetime event can be.

Personal Financial Security

Most business owners have the bulk of their net worth tied up in their business. Statistics show that for most, greater than 80% of their net worth is in their company, an illiquid asset, not guaranteed to sell. A strategy will be crucial to help plan the steps needed to unlock the wealth trapped in your business to achieve financial freedom and security.

The Future of the Company

The future trajectory of your company largely depends on the hands into which it’s passed, aka the buyer and new owner. Strategic planning done well in advance ensures you can leave your business in capable hands. Early planning allows you to figure out what type of buyer would be a good fit to take over your business, whether it's a competitor, a complementary business, your employees, or private equity.

Employee Stability

A business exit will most definitely impact your employees. The job security of the employees who have helped build your business is at stake. Thoughtful planning will help ensure these individuals and families are treated fairly and cared for throughout and after the transition process.

Client and Customer Relationships

It’s important to have a plan on how you will keep client and customer relationships protected and carefully transition to the new company. Maintaining and upholding the company’s values in how clients and customers are treated post-exit is crucial. A poorly managed exit can potentially destroy the company's reputation.

Family and Spouse

Stepping away from a business is not just the owner’s decision. Often, the owner’s spouse plays a significant role in moving forward with an exit. Many times, the spouse wants their partner to start stepping away to enjoy more time together, travel, or spend time with grandchildren. Starting the conversation early and having alignment can help business owners and their spouses go through the process with clarity and confidence.

Business Exit Tax Implications

Exits can trigger significant tax consequences, impacting your net proceeds from a sale. Planning in advance and implementing tax strategies can minimize this impact. In an upcoming episode, we will discuss ESOPs (Employee Stock Ownership Plans), a strategy that can avoid all capital gains taxes on a business sale.

Company Culture

Maintaining a positive company culture throughout the transition is essential. Communication is key. Some companies are very transparent with their team about the company’s goals and financials, ensuring everyone is on the same page. This alignment helps maintain morale and productivity during the transition.

Personal Identity

Personal identity is one of the most impacted aspects of exiting a business. Many business owners struggle with their identity post-exit, trying to figure out how to spend their time and what their purpose will be. Writing down and mapping this out well before the actual exit will help ensure you won’t have any regrets after stepping away.

Management of Your Time

Daily commitments, meetings, and interactions will potentially leave a void post-exit. This can be an adjustment, as many entrepreneurs are used to being busy. Listening to episode 80: Scaling and Exiting a Family-Owned Business can provide insights into managing this transition.

Business Partnerships

If your business involves partners, it’s vital that the exit strategy benefits everyone without harming any relationships. Early conversations with your business partner about their end game and timeline for an exit are crucial. Misalignment can make the planning process more difficult and put your business, family, and employees at risk.

Conclusion

Given the profound impact an exit can have, starting to plan at least five years in advance gives you the necessary time to address these factors proactively. This episode is a call to all business owners to prioritize their exit strategy just as much as their growth strategy. Remember, it’s never too early to start planning for the future. See you all next week.