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Exit Planning

Two Great Reasons Advisors Stay In Their Businesses

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Two Great Reasons Advisors Stay In Their Businesses

Last week we listed eleven reasons that owners make that cause them to delay or avoid planning for their business exits. Rather than jump into explaining how to counter all those, instead we begin with two reasons owners tell us they want to stay active in their companies. 

Recall that Exit Planning is founded on a basic premise: Unless a business exit gives owners and their families financial security (as they define it for the duration of their post-exit lives), and the ability to meet all of their other exit objectives, that exit is a train wreck. We call this “owner-centric” planning.

Reason To Stay #1: Return Outweighs The Risk

As a reason for staying, this one is easy for both owners and all stakeholders (spouses, advisors, co-owners, etc.) to understand. Put simply, some owners have

  • Observed the volatility in today’s stock market
  • Learned painful lessons from the 2008 market crash and
  • Realized that a low-risk investment-the U.S. ten-year bond is yielding less than two percent.
     

These owners rightly conclude that the income they currently receive from their businesses is much greater than they can earn from any other source. Further, owners in this camp anticipate that their businesses can generate more dependable returns than stock and bond markets. 

Reason To Stay #2:  “I Love What I Do.”

Some owners stay in their businesses past the point they could successfully sell them because they find running their companies to be more meaningful than anything they could do outside of the business. They may be long in the tooth, their refusal to exit may stymie business growth or frustrate management or business active children, but at the end of the day the decision to exit, including the timing of that exit is the owner’s, not ours as the advisor even if we think it is in our client’s best interest. 

We’ve found that when owners are pushed, or even pulled, into exiting before they are ready, the results are rarely positive and sometimes downright scary as a BEI member recounts.

During our annual year-end planning meeting, one of my clients mentioned that he was approached by would-be buyers on a monthly basis. His wife and children were eager for him to sell. We had already started improving the company’s value drivers and had documented the value of the company, but he wanted to start building a marketing strategy to sell the company and interviewing transaction intermediaries to orchestrate the sale.

Within six months, we had put the company on the market, and several buyers had submitted offers in excess of my client’s financial security goal of $4 million. This kicked off a bidding war. The buyers pushed their bids from $4M, to $6M, and then to $9M and $11M.

At that point, the business owner disappeared. I don’t mean that he stopped returning phone calls or responding to emails. I mean that no one—friends, family or colleagues—could locate him for days.

After much worry about his welfare, and some concern about how long the $11M offer would stay open, the owner reappeared. We were all relieved that he was alive and well, but I had to warn him that he was dangerously close to blowing the deal of a lifetime. This owner’s response took my breath away. “Call off the deal. I’ve thought long and hard about this and I don’t want to sell. I have no idea what I’d do with myself if I didn’t have my company.” I called my client’s investment banker and had him withdraw from the transaction.

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The saving grace for this owner (if there was one) is that he realized before the sale closed that he would be lost without the business. Pulling the plug on the sale process cost tens of thousands of dollars in fees and lost productivity, but much costlier was the emotional devastation the owner caused his family and himself.  The lesson, however, is one worth learning: If owners feel conflicted between staying and leaving, if they love what they are doing, it is NOT THE RIGHT TIME for us to encourage them to exit their companies.

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It Is Okay To Stay.

Not encouraging an owner to exit before he or she is ready to exit is very different from not encouraging them to begin planning their inevitable exit. Exit Planners can lay out the many benefits of planning and highlight how goodExit Planning gives owners options. Most importantly Exit Planning advisors help owners understand that they can stay active while continuing to grow the company’s cash flow and value. From an emotional readiness standpoint owners can carve out time to explore non-business activities should they change their minds about exiting.

One owner we worked with only changed his mind about leaving after he found an activity that engaged him. Jorge (we’ve changed his name, of course) owned a family-run automotive business. He was not opposed to transferring ownership to his two business-active children, but would not cut his workweek to less than sixty hours. This presented a real obstacle to:

  1. creating transferable value (making the business less Jorge-dependent) and
  2. motivating his children to stay in the company.
     

One day Jorge and his Exit Planning advisor were talking about their love of fast cars when the advisor suggested that Jorge might enjoy attending a racing school. Jorge enrolled and, within a year, his passion for the business gave way to another: car racing. This was a classic case of an owner exiting only once he or she has found something even more attractive outside the company. Further, if Jorge’s advisor had thought of himself solely as a CPA, attorney or financial advisor rather than as Jorge’s Exit Planning advisor (and thus committed to attaining the goals he’d helped Jorge to set at the beginning of the Exit Planning process), it is unlikely that he would have even made this suggestion.

Exiting a business is likely the biggest financial decision and personal decision of a person’s business life. Only owners should decide when they are comfortable leaving the business, but as advisors we can help them make that decision by testing their assumptions, asking important questions and providing information . . . all topics of future articles.

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