All business owners exit their business eventually. Planning is critical if you want to ensure a successful transfer of your business – whether that transfer be internal (i.e. to another shareholder, a management group or the next generation) or external (i.e. to an independent third party).
According to a recent CFIB study, less than 10% of business owners have a formal written plan, 40% have an informal plan and over 50% have no plan whatsoever. [1] Why have so many business owners avoided planning their exit?
Does this include you and, if so, what is holding you back? Here are the top 5 excuses that prevent business owners from beginning their exit planning:
Excuse #1: It’s too early for me to plan for succession
Fact: It is never too early. Planning should begin at least 3 to 5 years prior to exit because there are many issues that require time to adequately address. Identifying your exit option early (e.g. internal or external) is extremely important. Identifying how much you will need financially when you exit is critical. Allowing sufficient time to enhance the value of your business and ensure proper tax plans and structures are in place to minimize tax on the transfer before exit is also vital. Beginning your planning early could mean the difference between success and failure.
Excuse #2: I’m too busy
Fact: You are never too busy to do that which is important – it’s a matter of prioritization. If ensuring a successful transition to the next generation or maximizing your net proceeds on the sale to a third party is important to you then you will make time for the planning that is necessary to ensure these goals are achieved. If you are truly serious about meeting your transition goals and understand the importance of planning then you will make it a priority.
Excuse #3: It’s too complicated and I don’t know where to begin
Fact: It can be complicated but that has not stopped others from starting their exit planning. There are many helpful resources out there. Reach out to experts to assist you through the process. Do some research and speak with colleagues and/or other business owners that have been through the process successfully. Surround yourself with positive and supportive people. Look for a professional advisor with exit planning credentials and experience to guide you through the process and involve the specialists where and when needed.
Excuse #4: It’s too expensive
Fact: Exit planning is an investment that should form part of your “wealth management” budget. You pay professionals to “manage” your portfolio of publicly traded securities. According to The One Percent Solution, privately held business owners should invest 1% to 2% of the value of their business each year on exit planning initiatives (e.g. business valuation, value enhancement initiatives, life insurance, tax and estate planning, etc.) [2] This investment will pay off in the form of a higher business value (or price received) and less taxes paid, resulting in more money in your pocket – not to mention the decrease in stress knowing that your affairs are in order.
Excuse #5 – I don’t want to think about leaving my business
Fact: You may not want to think about leaving your business but you will leave your business one day. The departure from your business will be voluntary at at time of your choosing or it will be involuntary as a result of your death, disability, disaster, divorce or disagreement. Would you rather exit your business on your terms or have your family deal with your unexpected forced exit? Who will run the business? Will it be salable? Will it be dissolved? Will there be taxes to pay? Start planning now so you can choose while you still have the control to make a choice.
If you would like to sell your business within the next 5 years, you have a tremendous opportunity to sell for a significant premium – provided you conduct the proper planning! Those business owners that ignore planning could end up selling for a significant discount or face liquidation altogether.
Are you part of the 50% of business owners that have no plan whatsoever? If so, what is holding you back? Join me next time when we address how to overcome what is holding you back.
1. Source: CFIB Research Report November 2012 “Passing on the Business to the Next Generation”
2. Source: The One Percent Solution, Z. Christopher Mercer, 2007.