The Middle Market Review Insights on the Middle Market.

Subscribe Subscribe

Subscribe Today

Please provide valid email address

I want to receive:

Thanks for subscribing!

Advisors

Why Entrepreneurs Sabotage Their Own Exits — And How to Respond

Tags

Mid-market advisors know that business exits and sales are often far from purely rational experiences. The behavior of owners and CEOs can be contradictory to their long-term interests.

Why is this the case? We believe it is fundamentally an issue of the owner/CEO’s psychology.

Successful mid-market entrepreneurial owners consistently drive through barriers, endure volatility, and push beyond uncertainty with relentless tenacity. Individually, members of this elite group are as unique and diverse as the businesses they represent. However, researchers consistently find that they also share a set of common strengths that drive their success.

While these strengths are essential for building, growing, and leading a successful middle market company, they can also lead to behaviors that make exit and transition profoundly challenging.

Experts agree that business valuation increases with a robust exit or succession strategy in place. Yet studies by Stanford Business School, Bank of America US Trust, and PricewaterhouseCoopers consistently highlight the lack of exit planning in the middle market. Sixty-seven percent of CEOs and owners with advisors do not have a plan. These owners usually fall into one of three groups:

  1. The Immortal believe they will live forever. Their succession plan is to never die.
  2. The Willfully Ignorant know that they should be planning, but fall into a cycle of persistent delays, avoidance, and justification for failing to plan.
  3. The Misled are under the false belief that a will, trust, tax strategy, or buy-sell agreement is a sufficient succession plan.

These talented, skilled executives have the ability to build and execute complex strategies that grow successful firms, yet many fail to protect themselves, their firms, and (in the case of a family business) their heirs.

The Characteristics of Great Entrepreneurs

The common strengths of entrepreneurs — essential for building a business — can become an Achilles Heal when it comes to exit planning.

1. Need for Achievement: This helps business owners stay committed in the face of challenges. Those with a high need for achievement derive pleasure and satisfaction from breaking through barriers others cannot.

This strength is fundamentally at odds with exit and succession. For many owners this stage of their business may feel like a death sentence — and dying is not an accomplishment any owner is driven to achieve. Thus, owners apply their energy to more immediate goals and/or downplay the importance of the work required to exit well.

2. RiskTaking: Starting something from nothing or moving a firm to greater levels of success requires tremendous courage and the willingness to put ideas, money, time, and reputation on the line with no guarantee of success.

But this strength also has the potential to lead owners to self-deception. They may fail to appreciate complexities, overlook their own gaps in knowledge, or fail to acknowledge the time and effort required to exit on top.

3. Desire for ControlEntrepreneurial owners want to design their own identity and direct their own work.

Most owners perceive exit as a once-in-a-lifetime event that requires the skills and assistance of third party professionals. Owners may feel these outsiders are impinging on their control and dislike being dependent on others. The process can also bring up personal questions of generativity, significance, and identity. Some may fear that having a plan in place could unintentionally hasten their exit.

How to Respond

Professional advisors can serve owners best by leveraging their innate strengths.

Avoid a risk-averse “trust the expert” approach. Instead, frame the owner’s exit as their ultimate crowning achievement — proof that they created a business built to last. Focus on the benefits of maximized value and increased profitability that a robust succession planning effort can bring about.

Help owners embrace exit as a strategic business challenge that must be overcome. Provide different scenarios that freely acknowledge risk and return rather than presenting the single most risk-averse option as the solution.

Advisors in many cases inadvertently posture themselves as the smartest person in the room — impinging on the CEO’s desire for control. Make the CEO/owner the expert. Ask the owner to tell you:

  • How they built the business
  • What is most important to them about their business today
  • What they find to be the most challenging aspects of business ownership
  • What they would like for their business in the future
  • What they are passionate about outside of their business

When presenting solutions, incorporate their answers and provide scenarios that allow the CEO/owner to choose, rather than be told (or worse, sold) the solution. Remember, this is the CEO/owner’s business, their wealth, and their legacy.

A solution that makes the most sense to you as the advisor may not be the best solution for the owner. And, the solution that is right for the owner may appear less than optimal, logical, or rational to an advisor. By establishing an open relationship that appreciates and works with the owner’s psychology instead of against it, advisors are able to add tremendous value and help owners maximize their wealth and legacy.

Learn More About Joining Axial

Request Information

Subscribe to Middle Market Review

Subscribe to Middle Market Review

Please provide valid email address

I want to receive:

Subscribe

Thanks for subscribing!