Why Exit Planning is Vital to Business Owners
Many CEOs focus on the present: how they can add value to their company today and in the future. So, why would a CEO want to focus on leaving the company? The topic of succession is difficult (and perhaps emotional), but it is an important one. Here are eight reasons that you need to look to the future. The first? The chances of selling an illiquid business are less than 5 percent.
June 6 2011 by John M. Leonetti
Exiting a business is not so easy. It’s quite difficult, in fact, and the odds are against it happening successfully for any given business owner. Let’s take a look at an owner who I spoke with recently about his plans for an exit from his business. He admitted that the business was his primary asset and that without a successful financial outcome from his exit, his retirement plans would be seriously compromised. Despite the reality of his situation and his recognition of such, he had not made any plans for his exit.
When I pressed him for why he would let something as important as planning for the largest financial transaction of his life go unattended, the best answer that he could give was that nobody was offering to help him with it and it seemed too overwhelming to handle on his own. After all, as a successful business owner his ‘job’ is to build his company and increase his cash flows, not to plan for his exit. And from that short story we get a glimpse of what millions of business owners across the country are facing as the leading baby boomers turn 65 this year and are seriously thinking about retirement. In addition to the sheer number of owners that are needing this service, also consider the following:
- An illiquid business has a statistical chance of less than 5% of being successfully sold.
- A properly installed succession plan can take up to five (5) year to implement.
- Financing for transactions has not entirely returned and may not for some time.
- With interest rates at historic lows, the cost of financing these transactions will increase over the next few years.
- Capital gains tax rates have been extended for two (2) years at 15% but may or may not stay this low beyond that time period.
- Business owners need to deal with their emotional ties to the business as well as their attitudes towards their own mortality to make exit planning a priority in their lives.
- The number of baby boomers far exceeds the number of echo boomers and the attitudes towards business ownership are also very different amongst these groups.
- And, most timely and relevant, is the fact that these owners are just now beginning to see signs of recovery from this great recession and are needing to take stock of the current value of their businesses.
So, what does it mean to help a business owner manage their wealth? Well, for me it meant helping owners navigate this complex decision-making process and to get on a path toward defining and achieving their goals. This is what our industry, generally speaking, calls ‘exit planning’.
An exit transaction is going to be the largest financial transaction of this owner’s life. In fact, without exaggerating, this financial event is more likely the largest financial transaction within the family tree for that business owner and has the opportunity to provide wealth for generations to come.
The difference between a successful business exit and an unsuccessful one boils down to whether a business owner will have a family legacy or a family secret. Legacies are wonderful. But when a lack of planning creates a substantial loss of wealth many observers ask the question that seems so obvious in hindsight, i.e. ‘why didn’t that successful owner know enough to make plans to avoid such a terrible outcome?’