We have had the pleasure of serving multiple entrepreneurs and business owners over the years at my firm, Glassman Wealth. Business owners often face unique issues when it comes to managing their financial portfolios, especially when it comes to planning for retirement. Unlike other clients, the most valuable asset a business owner typically has is their business, so it is essential to plan ahead about how to deal with that asset. And yet planning to exit a business is often incredibly difficult for entrepreneurs for a multitude of reasons, ranging from emotional to operational.
I was recently struck by an article written by Mitch Gorochow of the Center for Business Transition at RSM US LLP, the nation’s leading provider of audit, tax and consulting services focused on the middle market. In his piece, Gorochow laid out his case for the top 10 mistakes business owners make when they consider exiting their businesses. It’s worth reading the entirety of the article when you get the chance, but here’s my take on those 10 mistakes Gorochow identifies.
1. Too emotionally attached to their business
I often hear entrepreneurs describe their businesses as their “babies.” And it’s understandable, as you put so much of yourself into “raising” your business from the ground up. But as Gorochow points out, having those strong emotional bonds to your business can cloud your judgment, especially when you start to consider questions like: “Who will take care of this business like I do? Who will understand how to run this business like I do? What will happen to my legacy that I dedicated myself to building?” The remedy, Gorochow says, is that you need to create some healthy distance so that you can look at your business more objectively, not unlike what you do when you send a child off to college.
2. Not understanding how buyers evaluate their business
Entrepreneurs are typically gifted when it comes to conceiving and then delivering great products and services. But they don’t always understand how an investor might value their business. The fancy new office you just built, for instance, might be perceived more as a liability to the value of your firm than an asset. While a strategic buyer might use a different methodology, Gorochow says that the principle driver of the value of your business is the “predictability of the future cash flow the business will generate.” The more predictable those cash flows are going forward, the more valuable your business becomes.
3. Understanding the importance of a committed management and leadership team
One factor of selling a business that some owners overlook is who will run it when they’re gone. While some buyers might prefer to install new leadership, many are looking to acquire companies that will retain a strong management team after the sale is completed. A buyer will likely ask: can the company continue to generate cash even after you’re gone? That’s why it is critical to communicate with your team ahead of time to help ensure as smooth a transition as possible.
4. Not preparing for life post-sale
Ask yourself: what does retirement after you sell your business look like? It’s important to be honest about how you will spend your time once you don’t have to show up at the office. As Gorochow says: “Just having financial independence and flexibility does not lead to fulfillment.” While you might think you’re ready to dedicate your life to joining the PGA Tour, Gorochow says that he’s had numerous clients quickly descend into boredom and a lack of direction. For some of us, there are only so many holes of golf you can play. They key is to plan ahead and consider enrolling in new activities like charity work, mentoring and teaching, or even starting a new business.
5. Not properly evaluating all exit options
There is more than one way to go about exiting your business. Simply selling 100% to a third-party is just one of the options. Alternatives include selling partial or a minority ownership stake in the business or even selling to your employees through something like an employee stock ownership plan or ESOP. The point is to educate yourself ahead of time so you can pick an exit plan that aligns best with your long-terms goals for the business.
6. Not facing family issues head on
One major issue every family business needs to confront early on, says Gorochow, is entitlement. If family members feel entitled to certain positions or compensation, it can be extremely difficult for the founder of the business to ever successfully exit. After all, trying to do what’s best for family members and what’s best for the business can often be at odds with each other.
Arthur Dykes, a partner in RSM’s Private Client Group, believes that business owners shouldn’t assume that the next generation has the skills to run the business. He rarely sees an effective, formalized training program to help successors learn the skills necessary to run the business.
7. Not understanding and planning for the new economy
Imagine if you owned a taxi company that you were banking on selling to fund your retirement. A few years ago, that might have seemed like a good investment. But thanks to the rise of ride-sharing companies like Uber and Lyft, your business might now be close to worthless. As a business owner, you need to keep on top of how key trends in the economy—technology, environmental, cultural, and political—could disrupt your business not just today, but in the future.
8. Not cleaning up bothersome contingencies
Gorochow says that potential buyers of businesses hate two things more than anything: surprises and unknowns. That means that you, as a potential seller, should do your best to clean up as many “loose ends” inside your business as possible before you consider selling. Think potential lawsuits, liabilities, employee claims, IRS issues, etc. At the very least be prepared to disclose any of these issues to a seller ahead of time.
9. Working in the business and not on it
Entrepreneurs typically start their businesses based on something they are good at doing. They see a need in the marketplace, so they step in to provide it. Problems arise, however, when these same entrepreneurs fail to evolve from working “in” their business to working “on” their business. Similar to how owners have to distance themselves emotionally from their businesses, Gorochow says they also need to start planning at least three to five years ahead of time for a sale to best position the firm for their potential exit.
10. Being overwhelmed by all of the moving pieces in an exit
The 10th and biggest mistake that owners make when it comes to exiting their businesses, says Gorochow, is that they get overwhelmed by the process. As a result, “they just let things happen to them, have less control over the entire process and settle for a less than satisfying exit.” The remedy, he says, is to start thinking as early as possible about a potential exit and get help from a qualified team to help you create your plan.
Dykes sees a solution in collaboration among advisors. An entrepreneur earlier in his career, he says that, “The mistake I made was not surrounding myself with the right team. I tried to do it all myself.” The unintended consequence was an unintended increase in tax liability; something he tries to help clients avoid in his practice.
Just like you wouldn’t try to sell your house without a plan to maximize your return, start now when it comes to thinking about how or when you might exit your business. The sooner you start, the healthier and happier you’ll be.