What causes business owners to stand still when they should be moving forward to plan their business exits? If the business owner agrees with a comprehensive analysis of the issue, what is the reason for not going forward?
Owners generally know they need to engage in some level of planning in order to exit successfully. But they don’t begin planning because they make faulty assumptions on how long and expensive planning will take. As a result, they believe that the gap between what they have in terms of financial assets and what they will need is small or non-existent.
Surveys conducted in 2014 confirm this issue: about half of all owners do not feel a sense of urgency to begin planning. Yet, more than one-third want to leave within five years and 60 percent within ten years.
The Bottom Line: Unless owners feel a sense of urgency, they turn their attention to other fires that need to be stamped out immediately.
A sense of urgency necessary to cause an owner to take immediate action occurs only when the owner realizes how long it will take to successfully exit. Creating that urgency requires two actions:
Action 1. Business owners need to know the size of the gap between the financial and business assets they actually have, and the assets they will need in order to attain their exit goals. This requires an accurate determination of current assets such as business value, cash flow and the strength of the business’ characteristics that drive value or “Value Drivers.” Once the gap between what they have and what they need is measured objectively, the time owners will need to close it depends not on their guestimate but on:
The creation of a growth plan to increase cash flow and business value
The execution of a plan to create “transferable value” by changing the owner’s role and importance in the business,
The development of a best-in-class management team, and
The creation of a timeline for each action with deadlines and names of those responsible for execution.
Action 2. Business owners must appreciate and accept the time needed for a successful transfer of ownership to “insiders.” Almost two-thirds of the Exit Plans our clients create are transfers to insiders. Insiders include: management, key employees, children or co-owners. Usually they have little, if any, money available to purchase a business.
These transfers take time, seldom less than five years, because:
Insiders are usually not prepared to take over a business immediately,
Businesses have insufficient current value, and most importantly,
The transfer of ownership is achieved incrementally so that the owner retains full control of the business until he or she has received all of the money they need or want.
Taken together, this is the implementation of an Exit Plan. Depending on the size of the gap, it typically takes owners five to ten years to close the gap and attain their exit goals.
Doesn’t it make sense to explore your planning options? For a free assessment with no obligation, check out www.CovenantBusinessSD.com. We provide a wealth of resources specifically for business owners.