Business owners are often too focused on day-to-day challenges to plan for the eventual transfer of their businesses. This lack of planning can jeopardize the future of their companies as well as the financial security of their families. Below are the top 5 consequences of not preparing your exit plan or Business Ownership Transition Plan (BOTP).1. Not Being Able to Afford to Sell Your Business and Retire – Most business owners don’t realize just how much money they will need to net from their sale to accomplish their financial goals. You need to be able to answer these important questions well in advance of your exit:
- Will I be financially able to live out my years in comfort?
- Will I be able to do the things I have dreamed of doing?
- What if I don’t net enough from the sale of my business?
Unfortunately, most owners don’t ask these questions until it’s too late. Taxes and fees can dramatically reduce your net proceeds from any sale, even in an owner-financed scenario. Fortunately, there are sale structures that can minimize the tax burden, but time and planning are required to achieve this.
2. Limited Exit Planning Options – Last minute transitions driven by burn-out or untimely events such as disability, illness, or death can be damaging to the business and limit the options.
Owners who do not have a continuation or succession plan run the risk that their business will not be able to continue without them. This can place everyone dependent on the business for their livelihood in great peril. This risk also decreases business value from a buyer’s perspective.
3. Not Being Able to Keep the Family in the Business – Countless family businesses have fallen apart or had to be sold because of this lack of planning.
Most family business owners just assume their businesses will simply pass from one generation to the next and continue without any planning or forethought. The reality is that less than 30% of family businesses experience a successful transfer from the first generation to the second and it gets worse with each generation thereafter. Family dynamics often create challenges and concerns not present in other businesses. A lack of planning can result in ill-prepared successors and strained relationships between those who are and those who are not involved in the day-to-day operations of the business. Your family harmony, legacy, and financial future depend on making sound business decisions.
4. Being Taken Advantage of by Unscrupulous Potential Buyers – Business owners often think that the sales process is all about waiting for someone to approach them and then just completing a bunch of paperwork to close the deal.
In reality, you need to be proactive and cast a wide net to find the right buyer. If you are approached, you need to be sure of an interested buyer’s intentions and their financial resources to buy your business before you share any financial or business information, or you put yourself at risk. Following proper protocol and working with advisors can help protect you and your business. Planning in advance will allow you to find the right buyer and correctly handle unexpected prospective buyers.
5. Not Being Mentally Ready to Leave Your Business – Owners need to determine how to extract themselves from the business and what they will do after stepping away.
Often, we find that business owners’ identities are very intertwined with their business – being CEO is who they are and gives them their feeling of self-worth. Separating yourself from the business is a process that takes time. You need to ensure that you are mentally and emotionally ready to leave your business and find other activities or interests where your talents can be put to good use.
If you are one of the millions of baby boomer business owners who will be looking to exit your business during the next decade, we encourage you to develop and implement your exit plan at least 3 to 5 years in advance. This takes time but is worth the effort. When it comes to planning for the future of your business, your family, and your retirement, there are no shortcuts to success. Selling your business is likely to be the largest financial transaction of your life. Make it a successful one by planning in advance!