As a business owner, you’ve poured your heart, soul, and countless hours into building and growing your enterprise. Yet, there comes a point in every entrepreneur’s journey when the prospect of an exit becomes a reality. Whether retirement beckons, a new venture awaits, or life takes unexpected turns, planning for a seamless business transition is paramount.
Exit Planning: A Necessity, Not an Option
No matter how deeply rooted your commitment to your business, the reality remains that you’ll exit one day. Embracing this certainty and planning for it can turn a potentially daunting process into an opportunity for growth and prosperity. By proactively strategizing your exit, you shift from exiting by default to exiting by design. This shift empowers you to shape the legacy you leave behind and to maximize the value of the business you’ve dedicated your life to building.
The Dual Role of Personal Factors
We universally acknowledge that determining a business’s value is a scientific process. Many individuals think that evaluating a business’s worth necessitates a comprehensive examination of its financial records, an assessment of the market, and various other forms of quantitative analysis.
Many owners frequently disregard other vital elements when assessing their business’s value that pertains to the owner and their intentions, the reasons for their departure, and the actions taken to prepare the company for transition. The owner’s motive for exiting and their preparatory measures towards departure can significantly impact the value of their business.
When comparing two similar businesses, if each owner possesses different motivations for exiting and different exit preparation strategies, their business values will likely differ significantly. These factors combined can produce approximately 53% of the disparity in value between two otherwise similar businesses.
Reasons For Exiting
Your motivation for stepping away from your business holds significant sway over the manner and timing of your exit. We can categorize these reasons into three distinct groups that contribute to the business’s overall value.
- Personal Motivations
The exit reasons include your desire to diversify wealth, cash out, or embark on a new venture. For instance, you might dream of exploring uncharted entrepreneurial territories or pursuing other investments that align with your evolving financial goals.
The business holds greater value when the proprietor is internally driven to embark on a fresh endeavor or phase in their life. One could infer that this group of owners has achieved their self-established objectives for both themselves and the company, motivating them to move on to the subsequent stage of their lives.
Selling for personal motivations is exiting by design.
- Personal Crisis:
Burnout, health issues, stress, or family crises can all precipitate a need for an unplanned exit. Such situations underscore the importance of proactive planning even if you don’t intend to sell for many years. It helps in anticipating unforeseen challenges and implementing strategies to mitigate their impact.
When an owner exits due to a personal upheaval, it adversely affects the business’s value. The company is unprepared to transition to a new owner, and a potential buyer will discount its value.
Selling for personal crisis reasons is exiting by default.
- Personal Peaked:
The feeling of having reached your peak in the business can also spark an exit. Perhaps you’re yearning for more time to indulge in hobbies, spend time with your family, travel, and focus on health, or you’re contemplating retirement after a fulfilling journey.
When the owner believes they have reached their personal pinnacle, the factors driving their departure can impact business value. For example, a strategic buyer may take the company you’ve built to a higher level and continue building your legacy. They may have a deeper management team or can add your products or services to their offerings for their more extensive customer base.
Selling because you personally peaked is exiting by design.
Each category plays a distinct role in influencing the business’s value, whether by enhancing its attractiveness to buyers or affecting its overall operational stability[1]. You’ll likely get significantly more value if you plan to exit by design rather than being forced to leave by default.
Personal Readiness to Exit
Your preparedness to exit is equally pivotal. Preparing both yourself and your business for the transition will significantly impact the outcome. Proactively planning for an eventual exit, regardless of the timeline, can substantially affect your business’s value.
There are four main areas to focus on:
- Personal Financial Goals:
Business owners often consider their businesses as part of their family. They have difficulty assigning a value to the company, similar to not being able to set a monetary value for their children. Some business owners perceive their businesses as priceless and focus on the highest offer they might receive rather than the lowest offer they would be willing to accept. We define the “minimum number” as the lowest amount a business owner would be willing to take to exit the company without any regrets. Owners who have considered their minimum number tend to build businesses around 5-6% more valuable.
Interestingly, the owner doesn’t necessarily have to validate the accuracy of their minimum number to have a more valuable business. Simply contemplating this figure seems to help the owner prepare for an exit, resulting in a more valuable company.
Action Item: Determine your minimum number for exiting the business.
- Personal Life and Social Goals:
Like how parents raise their children, particular owners dedicate a significant portion of their time to their enterprise, often exerting over 60 hours per week within their organization. They establish camaraderie with their staff, welcoming them into residences and commemorating significant occasions such as their employees’ marriages. Owners who recognize the potential implications of their departure on their social life seem to possess a more valuable business.
Action Item: Evaluate the extent to which your business and personal life are intertwined and what adjustments might be needed to facilitate the transition.
- Involvement After Exit:
Many owners think leaving will be easy. Like selling a home, they’d relinquish the keys and receive a hefty sum. However, exiting a business is significantly more involved than selling property. The greater the owner’s willingness to remain engaged post-departure, the higher the company’s perceived value. An owner receptive to alternative avenues beyond handing over the keys garners a business appraised 4-5% higher. Buyers are inclined to offer extra compensation for the owner’s involvement during the transition.
Action Item: Determine your desired level of engagement post-transaction, whether you want to stay involved or fully step away.
- Employees’ Well-being:
New parents frequently contemplate the prospects of their children, including their career, family, and personal aspirations. They think about the potential effects of their parenting style on their children’s lives. Similarly, many owners are concerned about their employees’ treatment once they depart. Some owners develop strategies to express gratitude to their staff, while others negotiate with the buyer to ensure the well-being of their employees. Crafting a thoughtful plan and considering the welfare of the employees seems to result in a 17-21% increase in business value, irrespective of whether they communicated the exit plans to the employees.
Action Item: Formulate strategies to express gratitude to your staff and develop a plan to put in place for your employees’ future, ensuring a smooth transition and fostering their continued success.
Conclusion
In the realm of business ownership, exits are inevitable. Yet, your approach to these exits can transform them from apprehensive farewells to triumphant transitions. By proactively planning for your eventual exit, aligning your motivations, and preparing yourself and your business, you can ensure a successful exit by design, not by default. Remember, each step you take today can shape the value and legacy you leave behind, ultimately paving the way to your financial freedom.
**IMPORTANT DISCLOSURE**
Arlington Wealth Management is a Registered Investment Adviser (“RIA”). Registration as an investment adviser does not imply a certain level of skill or training, and the content of this communication has not been approved or verified by the United States Securities and Exchange Commission or by any state securities authority. Arlington Wealth Management renders individualized responses to persons in a particular state only after complying with the state’s regulatory requirements or pursuant to an applicable state exemption or exclusion. All investments carry risk, and no investment strategy can guarantee a profit or protect from loss of capital.