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CEOs

Exit Planning is not the End

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Many business owners view planning for their transition or “exit” from their company as an event they need to deal with only when the time comes. After all, who wants to think about retirement before you need to? There is a stigma to that word that turns business owners off. “Retire” = “Old” in their mind. No one wants to view themselves that way, especially baby boomers. And they are right. It’s not the end; it’s really the beginning of the next act in their life.

According to the Exit Planning Institute, there are three phases of life. In the first phase, you are growing up. We all know how tough that is. In the second phase you are helping others grow up, i.e. your children. That we know is even tougher. In the last phase of your life (your third act), if you are lucky, you can watch your children help their children grow up. As long as you still have your health and a little money this could be the best time of your life. The pressure is off; the cost of living is down. If you planned properly, you should have considerable disposable income and more time than ever before. But accomplishing that requires a lot more than most people think. Extracting the maximum value out of their life’s work to fund that desired life style requires the owner to work “on” not just “in” their business.

Here is a little exercise that illustrates how to define the third act. First, you need to determine your life expectancy. Often this is >75. Now subtract your current age from your life expectancy. This is your third act. As you will see, it’s a considerable length of time; as much as a third of your life. Why would we not focus some effort properly preparing for and funding something as significant as the last third of our life? Unfortunately it is not happening. A recent study on baby boomer owners by The Business Enterprise Institute, concluded that business owners:

  • Underestimate the amount of capital required to achieve their needed post-exit income.
  • Overestimate the amount of capital they’ll have available to them at their exit. And,
  • Grossly underestimate the amount of time they need to grow value, cash flow and income producing assets to achieve their post ownership goals.

These three situations create significant gaps between owner expectation and ultimate reality. Owners need to understand these gaps and find ways to minimize or eliminate them. This requires a process that readies both the business and the owner to be able to act judiciously when the market timing is right. This is the essence of exit planning. An exit is not an event, it is a process — a process of readiness and optimization that can take 2-3 years to complete.

A properly executed exit strategy takes years to achieve and requires professional help. It will contain the value enhancement process elements shown in the figure below and, depending on the needs of the owner, may not immediately involve an exit at all. The good news is that it is a decision that the owner can make once all the facts and options are made clear. The decision is based on a thorough understanding of the alternatives and their consequences, not guesses, wishes or supposition. It is a way to organize thinking based on facts and minimize the risk of unfulfilled or unrealistic expectations. It involves analyzing, road-mapping and executing a plan to maximize value and achieve both personal and financial goals. The processes ensures that the owner is financially secure, and has achieved the desired net proceeds at exit. And finally, it will focus on achieving personal fulfillment in the “third act” of his/her life.

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Why is optimizing enterprise value at the heart of exit planning? Some would argue that if you are seeking an inside transition such as family, employees, or management, that enhancing value is not one of the goals of the exit strategy. One might also point out that in at least half the cases, maximizing value was NOT one of the primary objectives of the owner at exit. The fact is that mitigating risk (taking chips off the table) is the primary motivation at exit in almost half the cases.

The flaw of these arguments and of much of the conventional thinking is the focus on the end, the event, not the process which leads to the event. Remember exit planning is a process not an event and you can’t treat exit planning as something separate from business planning. Creating a strong exit plan is good for everyone; especially if you are going to sell the business to family, employees or management.

A transition or exit plan is not some separate event on the horizon that owners need to get ready for. It’s integrated into the way they live their lives and run their businesses, every day, all the time. With a weak or missing exit strategy, it means an owner doesn’t have any personal, financial or business goals worth working towards. If that’s the case, there are much bigger problems than a missing plan, including losing influence over the third act of one’s life.

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