Generally, business owners feel comfortable being owners. They enjoy what they do, but rationally, they know they need to change their roles in their businesses eventually. But most owners don’t resist planning their business exit on a rational basis. Instead, they resist master planning at an emotional level.
Consider Charlie, a 50-year-old business owner. He loves working at and owning his 25-person manufacturing company, but he knows that he’ll eventually need to start preparing for retirement. He assumes that if he can sell his business for about $5 million, he and his wife can live comfortably and still help send their grandson, Timothy, to the finest schools. He gets his business professionally appraised and learns that it’s currently worth $3.5 million.
Charlie talks to his friend, a fellow business owner, about his exit. His friend refers him to an Master Planning Advisor, who lays out several strategies to get his Master Plan started, including urging him to train a management team to assure that his business has transferable value.
The result of inaction
Charlie agrees but doesn’t act.
After leaving his Advisor’s office, he begins working on a proposal for what could be the company’s largest contract ever.
Three months later, Charlie’s business wins the contract. This win rekindles Charlie’s love for the business, and so he puts off master planning for when he gets tired of working. Rationally, he knows he should address his retirement, but he’s riding the high of success. He stopped taking his Master Planning Advisor’s calls, figuring he would worry about his Master Plan when he was ready.
Ten years later, Charlie decides that he’s ready to exit. He considers calling his Master Planning Advisor but decides he doesn’t want to pay for his services and can do it alone. After all, he closed the biggest deal in his company’s history alone.
Though he’s confident that he can sell his business for at least $5 million, he has his business professionally appraised once more. He finds out that it’s worth $6.5 million and decides to sell. After putting it on the market, he meets with a serious buyer.
During the meeting, the buyer’s representative asks Charlie, “Can you tell me about your management team?”
“You’re looking at it,” Charlie says proudly.
“So, who takes over when you leave?” the representative asks. Charlie pauses, then says, “I figured that was your responsibility.”
The representative asks a few more operational questions and tells Charlie she’ll be in touch with him. A week later, the buyer offers Charlie two options: $3 million pre-tax if he leaves now or $5 million pre-tax if he stays on to help train a management team over five years.
Charlie is furious and points to his professional valuation. The buyer’s representative tells him that his valuation assumes he stays with the business. She also explains that cash flow has remained stagnant since winning the big contract, meaning the buyer would have to invest in building cash flow. Charlie declines the offer and approaches several other buyers. But those buyers heard that Charlie pulled out of a deal earlier.
Coupled with the fact that he had no management team outside of himself, each buyer offers even less than the original buyer.
The right way to do it ...
In desperation, Charlie calls his Master Planning Advisor and tells him what happened. He suggests setting up a meeting with him.
At the meeting, Charlie’s Master Planning Advisor explained how master planning could help him create transferable value that would allow him to reach his personal financial goals and ensure that the business would continue to flourish without him. He explained that value enhancement of the business and associated transition planning would take a few years. Fortunately, during those years, Charlie could change his role and focus his efforts on business areas that would benefit him and his company.
Emotion plays a huge role in business owners’ exit decisions from fear to overconfidence. Charlie lost millions of dollars and years of retirement because he had no one to act as a check on his emotions.
Leaving the business is one of the most emotional events business owners can face, which means business owners should take care when making decisions that can affect their business exits.
The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact a lawyer or a tax or financial professional. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial professional. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Master Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice you need.
Any examples provided are hypothetical and for illustrative purposes only. Examples include fictitious names and do not represent any particular person or entity.
