“To begin with the end in mind means to start with a clear understanding of your destination. It means to know where you’re going so that you better understand where you are now and so that the steps you take are always in the right direction.” —Stephen R. Covey
One hundred percent of us are going to leave our company one day. But only a small percentage of business owners have a plan for a transition. Planning for an exit is not typically something business owners do when you’re in launch, build, or growth mode. You’re busy running the business.
Another reason why business owners often neglect to prepare for their exit is the constant grind of running a company, which can be exhausting. Over time, this can lead to a sudden reaction from the owner, which is the biggest threat to business value. This owner’s desire to exit the company creates a “transition mindset.
My observation is that business owners typically fall into one of two categories:
- The first group wants to run away from the business due to reasons like boredom, burnout, illness, or skill gaps.
- The second group runs towards the next chapter of their life, whether it be retirement or starting a new venture. Your transition mindset and what drives your motivation to exit will be influenced by your specific circumstances.
Unfortunately, more negative exit motivations, or “push factors,” can lead to a reduction in the value of the business, leaving you without the time and inclination to plan your exit and enhance your outcome.
So why am I advocating for you to be thinking about your future transition or liquidity event to sell your business?
Because for many owners, it is like swimming in a murky pond. You can’t see where you’re headed with your business, and it feels uncomfortable not finding a way to leave the water.
This is a common discussion I have with guests on my podcast, Succession Stories.
Entrepreneurs share their succession stories–some expressed regrets in their transition experience, while others celebrated success overcoming obstacles along the way.
What I noticed from these conversations is that planning goes a long way toward making your vision come to life.
There are many paths that you can take.
Choosing which one is best for you is a great place to start.
Potential exit strategies:
- step back from the day-to-day
- take some chips off the table by bringing in an investor
- sell the business to third-party
- pass the business to the next generation of family
- sell the business to management
- retire from business
- stay on as a consultant, advisor, or board member
Some entrepreneurs have a mountain climber mentality. They built a business, moved on, and want to do it all over again. Seeking the challenge and thrill of the next mountain top journey.
It can be challenging to determine when the right time is to let go . . . especially when your growth is accelerating.
Is the “Not Now Mentality” holding you back?
Bill Prinzivalli (Succession Stories E111) learned this all too well, experiencing a rollercoaster of the highest and lowest points in his company. Bill started Prince Software in 1986 and eventually specialized in solving Y2K systems issues for Fortune 1000 companies. At its peak in 1998, it grew to fifty people, with nineteen international distributors, $10 million in revenue, and a $30 million valuation. With the exciting rise of the Y2K industry, Bill rode the wave but waited too long to execute an exit strategy. As the company’s growth potential diminished, so did its value.
I’ve coined a term called the “not now mentality” because I encounter it often. The challenge is that if you wait too long, your window to sell for maximum value will close.
When should you start thinking about business transition planning and working on things in earnest?
Depending on your specific circumstances, it could be seven to ten years ahead of an intended transition.
Not all companies will successfully pass on to a new owner. Here are some statistics from the US Bureau of Labor Statistics that might surprise you.
- 20 percent of new businesses fail during the first 2 years of founding
- 45 percent fail within the first 5 years
- 65 percent fail within the first 10 years
- Only 25 percent of businesses make it to 15 years or more
These statistics haven’t changed much over time and have been consistent since the 1990s.
Additionally, survey data shows that only 20 percent of small businesses listed for sale actually sell.
There are several reasons why businesses don’t sell, or make it past their 10th birthday:
- The company is not worth what the owner needs to exit. It’s possible the owner may have unrealistic expectations due to anecdotal valuation assumptions about similar companies in their industry. More commonly it is because the business is not worth what the owner needs to sustain their lifestyle outside of the business.
- There are inherent flaws that exist. If the company is losing money, is outgunned in the market, or has cash flow issues, a buyer won’t be excited about its prospects.
- Lack of transferability. A common challenge is transferability. Without the owner, some companies are not able to survive a change of hands. An owner who is deeply involved in the business day-to-day, serving in operations, customer service, and/or sales role, needs to ensure that the business can thrive without them at the helm. A business that isn’t transferable has more risk, and likely to yield a lower price than desired.
What is the reason to develop an exit strategy even if your timeline is ten-plus years away?
Here’s the amazing secret: all the things you need to prepare for an exit will enable you to run a more profitable and enjoyable business! So why wouldn’t you want to do that?
I’ve written a book to help owners create their exit strategy and make their companies more valuable before transitioning to their next chapter. The Business Transition Handbook is full of practical advice, insights from experts and business leaders, and actionable tools. What you’ll learn in this book is that regardless of your exit plan, you will be creating value in your business by avoiding common transition pitfalls.
Follow the book launch at www.thebusinesstransitionhandbook.com