We have all heard the old adage “start with the end goal in mind” or some variation thereof. The applicability of this message to business owners is echoed throughout publications and business advisors’ offices.

When launching a business, owners are most often laser-focused on growing the business. Seasoned business owners may be absorbed with sustaining the business performance as it reaches the maturity stage along the typical business lifecycle. What most business owners are not thinking of is the inevitable transition out, or exit. So, how much effort and attention should be directed to planning the exit? Well, like most things in life, the answer is it depends.

Let’s explore through two examples:

In the first example, we take 32 year old Bethany who started a digital marketing firm after holding two previous jobs since graduating from a top tier undergraduate program. She was a rising star and saw the opportunity to branch out on her own and further her brand and capabilities. She was recently married and is expecting to start a family within the next few years.

Before starting her business, she envisioned that she would maintain the business until her future children are old enough to have gained sufficient experience to take over the business. She would be her children’s safety net and ease into retirement. She hasn’t given much thought to any other avenues of exit nor has she considered the changing, competitive landscape of digital marketing.

With a thriving business, she plans to put away the maximum threshold into a SEP IRA, but initially will limit contributions until the business’s cash flows are adequate to support hiring additional employees and contribute to the SEP IRA. Additionally, she and her husband have worked with the family’s financial advisor to project the family’s retirement balances for which they are confident will provide them with a comfortably secure retirement.

Should Bethany be concerned with exit planning with such an extended runway until her planned transition? The short answer – yes.

Why should Bethany be concerned with exit planning?

  • Personal Circumstances – Bethany’s personal circumstances will change in the relatively near future based on her plans to start a family. Juggling the demands of operating a business and that of a young family is often difficult to manage. Bethany cannot fully predict other life events she may encounter. Namely:
    • Her health or that of her family
    • The health and retention of key employees
    • The strength and survival of her marriage
  • Market Dynamics – the Digital Marketing industry has been an extremely hot industry for the past 5-10 years, but there is no guarantee that it will be so indefinitely. Consumers, especially those of the younger generations have grown up with technology at the forefront and may be more inclined and capable of managing their own digital marketing needs.
  • Her initial plan to transition the business to her future children may conflict should they find different career paths. This could leave Bethany without an apparent succession plan. Expressing her intent to pass along the business to her children to key employees or customers may also impact the ability to retain top talent for fear of inexperienced leadership.

Before exploring the key attributes of solid exit planning, let us now turn to our second example. Our second scenario is business owner, John, whom never considered retirement or a business transition. Despite being 66 years old and having faced recent health issues, John has not thought through what to do with his niche manufacturing business if he becomes unable to continue running the business. The business has experienced the swings of the economy which has been strong over the last several years. However, his health issues have distracted him significantly and the business is showing early signs of the effects the lack of focus.

His two adult children have successful careers in unrelated fields and have expressed no interest in the business. In addition, his management team is aging and John’s controlling management style hasn’t allowed his management team to assume critical responsibilities. The relationships with customers have been built solely, or primarily, through long-term contacts of John.

John’s personal circumstances (e.g., recent health challenges) may be motive enough to consider a business exit. However, effective exit planning is almost never achievable when a business owner is forced to sell. Had John planned for his exit, he might have been able to ascertain that he very much needed to provide more challenging roles and responsibilities to his management team. He may have also realized the importance of the customers building trusting relationships with his team. As a result of John’s health and lack of an exit plan, John has most likely has squandered value in what may be one of his largest financial assets – his business.

As you can see from the two examples, business owners come in diverse packages. However, regardless of the business or personal circumstances, a business owner should respect the inevitable.

Two primary ways to maximize value through exit planning that any business owner should consider are:

Plan Early, Revisit Often – It is true that every business owner should establish both short and long-term objectives. Accepting the fact that goals often change for personal and business reasons over time, they should be revisited periodically to assess performance towards achievement as well as the relevance in the context of the present. Critically analyze, or engage a qualified professional to assess, the value of the business and determine the gap between exit expectations and current valuation. Develop actionable plans to increase the value of the business.

Achieve Business Independence – Many businesses are run by an owner that is heavily involved in all aspects of the business. Too scared to let go of control, these business owners make the business highly dependent on them. From customer and vendor relationships to oversight and delivery, no other employee or person inside the organization has been provided the opportunity to assume critical roles and responsibilities and make the business less dependent upon you the business owner. Thus, making the business less attractive to the buyer population as the goodwill is more attributable to the owner than the business.