Exit planning is not what you think

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When asked, “Do you have a successful company?,” many business owners would answer “yes.” They are very proud of what they have built over the years. They likely make good money and live a nice lifestyle. They have seemingly good customers, employees, a profitable company, and a sound balance sheet. However, when they eventually go to sell their company, they are slapped in the face. It’s a jarring experience to hear your baby called ugly.

Even after spending years building a successful company, owners fail to sell the business for what they thought it was worth. Or even worse, the business fails to sell at all.

Why? Because they do not have something of significance. A significant company is highly valuable, transferrable, ready, and attractive. It aligns to the business owner’s business, personal, and financial goals. It is not only successful, but also highly significant.

That’s where the accountant who delivers tax advisory services can play an integral role as part of the owner’s advisory team. And along with holding the Certified Exit Planner Advisor credential, the team can help the owner exit their company in a way that makes sense on a business and personal level. But more on that later!

Are owners prepared for their post-exit life?

In a recent State of Owner Readiness Research Report—a national and regional survey conducted by the Exit Planning Institute (EPI)—61% of owners strongly agreed that having a transition strategy is “important both for my future and for the future of my business.” In addition, 99% of the surveyed owners agreed with the statement in some form.

However, when analyzing the research, there is a big disconnect. Though owners agree that transition strategy is important, 80% have no written transition plans, 50% have done no planning at all, and 95% have no plans for the next phase of their life post-transition.

Three challenges business owners face

While experts in their business, business owners can face numerous challenges when trying to exit successfully. They are often met with the consequences of their lack of preparation, failure to create contingency plans, and their lack of holistic planning.

#1: Owners are unprepared

Many owners are simply unprepared because they believe exit planning is something you do 18-24 months before you sell your company, sort of like selling a home. Before you list your house, you might want to give it a face lift so that it’s ready for the market. Owners agree that doing the same with their business is important, but not urgent—so they kick the can down the road. 

Owners are just misinformed in the process. They do not understand that they are doing things daily that eventually impact the value of their company. They do not understand that an exit strategy is a business strategy. Too many are concentrated on success, income generation, or year-over-year profitability. Though this may provide a decent lifestyle over time, it does not create long-term value. Their mindset must change, from income generation to value creation. With value creation, they get short-term profitability and long-term strategic value by building a company of significance.

#2: The threat of involuntary exits

Based on EPI research, roughly 50% of the exits in the United States today are involuntary. These exits are forced due to unforeseen events, including death, disability, disagreement, divorce, and distress. Planning for the unplanned is critical. Building a company that is independent of the owner(s) helps to battle these unplanned elements.

Owners and their advisory teams can focus on building a company around the four intangible capitals: customer, human, structural, and social capital. These capitals allow the company to focus on items, such as a diversified and entangled customer base, elevating and empowering management and employees, integrating appropriate systems and processes, and building a culture beyond, and not reliant on, the owner.

#3: A failure to holistically plan for their exit

To successfully exit their business, owners must take a holistic approach; in fact, 75% of owners profoundly regret selling their business just a year after selling it. Typically, this is because the owner is not concentrated on what is next. Some owners started their company from the ground up, out of the shed in the backyard or garage. They have owned their business for more than 30 years. It is all they have known. They have likely let their business define them and have not focused on elements of their life, such as personal purpose, or goals and objectives for their life outside of their business.

The Value Acceleration Methodology

The solution to combat these challenges and change this current mindset is adopting a common framework and process. This framework is rooted in the alignment of the three-legged stool of business, personal, and financial, and is results-driven with a value focus.

This begins with the advisory team, and as a tax and accounting professional, you can play an integral role on the team, especially when you deliver tax and advisory services as part of your practice. Many owners turn to their advisor for advice on their business, growth, and exit. It is critical to have a team that has similar goals and objectives. This team believes in the same organizing principle and core concepts, while focusing on their expertise and role within the team. Building a diverse team of advisors with that mentality is paramount to success.

Once this happens, the owner and their team can begin to implement Value Acceleration into their company and life. The Value Acceleration Methodology helps to bring large visions for exit and life after business into one strategy and 90-day sprints—allowing the owner, management, leadership teams, and advisory team to work toward building value and aligning the three legs of the stool daily, as a part of their regular company routine and rhythm. 

Exit planning is not something to think about “when the time comes.” By incorporating value creation strategies into an owner’s business in the present, advisors can prepare them for significance in the future.

Key takeaways:

  • With value creation, owners get short-term profitability and long-term strategic value by building a company of significance.
  • Owners and their advisory teams should focus on building a company around the four intangible capitals: customer, human, structural, and social capital.
  • Combat exit planning by adopting a common framework and process.

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