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Why Do Business Exits Fail? Common Challenges and Solutions

*The following article was contributed by Greg Maddox, Senior Business and Exit Advisor at Cultivate Advisors

Every business owner will exit at some point, and we all hope it will be on our own terms and timeline. However, only 20% of those who try to sell actually do. Well, why is that?

Most business owners aren’t actually preparing their business for a sale. It’s a common misconception that a business exit is all about that final transaction, but in reality, preparing for a business exit takes many years leading up to that moment.

It’s not uncommon for one of the five Ds—death, disability, divorce, disagreement, and distress—to result in an untimely sale. Whether it’s the sudden death of a partner or a market disruption that drastically devalues your business, any of these catastrophic events can force an early exit. If the business is not in shape when the unexpected happens, the chance that you will get what you want from the sale (if you manage to sell at all) will fall dramatically.

Finally, many business owners fail to prepare themselves for the exit–both financially and emotionally. Even if the actual transaction goes through, exiting in a place of unhappiness or financial insecurity isn’t a truly successful business exit.

3 Common Challenges While Preparing a Business for Sale

When it comes to planning an exit and preparing your business for a sale, business owners generally face three hurdles they’ll need to overcome.

Challenge #1: You Really Own a Job, Not a Business

The first challenge is that most business owners own a job, not a business asset. This is because the business owner is typically crucial to the smooth day-to-day workings of the business as a whole.

But ask yourself honestly: If you, as the business owner, were removed from the equation, would the business continue to grow and thrive at the same level? Would it limp along, functional but not optimal? Or would it simply fall apart and fail after a short period of time?

Being mired in the day-to-day of running your business can impact your chance at a successful exit in two ways.

First, a business that can’t function without its owner isn’t as attractive to potential buyers. It will hold less value overall, as there is too much risk associated with the business failing after your departure. Even if someone agrees to buy or take over your business, it will be sold for a much lower amount than what you’re likely hoping for.

The second reason is more personal, but just as important. When you’re responsible for so much of your business operations, you are likely committing the majority of your time—including weekends and evenings—to running the business. This often leads to your identity and self-worth being entangled with the business. In fact, studies show that as much as 75 percent of owners regret selling their business just one year later. While “living the good life” after the exit may sound attractive, many business owners haven’t given much thought to what they truly want from life after the sale.

Challenge #2: All Your Finances are Tied to the Business

Another challenge that you may face is that all your financial eggs are tied up in the business basket. In other words, your net worth is locked into the walls of your business rather than being liquid and flexible.

Your business can grow to be the most valuable asset in your portfolio, and it makes sense to invest heavily and promote its success. At the same time, it should not be the only horse pulling the wagon.

This wealth gap between your personal and business finances can be an issue for multiple reasons. If one of the five Ds (death, disability, divorce, disagreement, or distress) forces an early exit, all the value of your business could disappear overnight, leaving you with nothing to maintain your quality of life.

Even if the exit goes smoothly, you could be left scrambling when your regular stream of income disappears after the sale of the business. Rather than regular payments, you’ll instead have a lump sum of money. Ideally it will be no small amount, but it’s also finite. If you want it to last for whatever you have planned next, you’ll need to have a plan.

Challenge #3: You Over-Sacrifice Elsewhere

In pursuit of solving the first two dilemmas, many business owners start to over-sacrifice in other key areas of their lives. You may find your health and family relations may suffer as you try to balance out your responsibilities and finances as you work to grow your business or prepare it for a sale.

Preparing your business for a sale is no small endeavor, and in many ways, you can consider it another job. It is physically, mentally, and emotionally taxing, especially when you put it off until the last minute.  Exit planning is just great business planning, which is why we recommend that you begin years before you plan on leaving your business.

While you may be able to white knuckle it for a short period of time, no one can operate at that speed forever. Exhaustion and burnout are real risk factors that can affect your success across the board–in making critical decisions for the sale, in running your business, and in maintaining your personal relationships and health.

How to Thrive Before, During, and After Your Exit

Fortunately, all of these challenges are solvable with the right team and strategy. Here are a few techniques to face down the difficulties inherent in preparing your business for a sale in order to come out ahead.

Start With Your Exit in Mind

Just about every aspect of exit planning can’t be accomplished overnight. Setting up yourself and your business for a successful exit generally takes 3-5 years.

At my firm, Cultivate Advisors, we work with business owners to help identify their freedom point. We define the freedom point as the amount of money you’ll need (after taxes, fees, debt payoffs, and so on) to fund what’s next in your life. What quality of life do you want to enjoy? Are there any hobbies or ventures you wish to take up after the business exit? Do you have other retirement goals, such as moving to a new state or traveling the world?

Once you identify your freedom point, you can assess your business’s current standing and determine how much your business needs to grow in order to reach that freedom point goal. With the help of a few key advisors–a business advisor, tax attorney, and wealth advisor–you can reverse engineer a plan to get there.

Even if you don’t have near or immediate plans to sell your business, you can look at exit planning as simply great business strategy. Approaching your business from an exit standpoint will help you focus on establishing infrastructure that makes your business more valuable overall.

Some of the aspects a business advisor will help you with include:

  • Leadership/decision-makers outside of the owner
  • Building teams empowered to thrive in their roles
  • System, processes, and documentation
  • Business continuity planning
  • Tech enablement

Focusing on these elements will increase your multiple, which will affect your business’s value far more than revenue.

In sales and marketing, for example, your systems and processes should include your sales funnel and a marketing strategy. Using data-driven forecasts, targets, and conversion metrics from your financial team, how many leads must your company generate? What is your plan to acquire those leads? What is your closing rate?

Even if you have these elements in place, you should formalize them with documentation.

Lean on Your Team, with Your Wealth Advisor as the QB

You’ve built your business from the ground up–often with yourself as the key player. However, when it comes time to plan for a future exit, you’ll need to let go of the reins and delegate.

Within your own company, this means building up a leadership team who can shoulder more of the decision authority. This requires passing-along crucial tasks to others and trusting them to make decisions that are in-line with your company’s vision and goals.

You’ll also want to put together a robust team of outside experts to help with exit planning,  including a wealth manager, tax, legal, and business advisor. These members of your exit planning team should coordinate, cooperate, and work together and NOT rely on you to coordinate or connect the dots. Exit planning is a team sport, but you don’t want to get yourself into a situation where you have yet another “job” that requires you to piece together all of your advisors’ advice.

Your wealth manager can be your biggest ally here. A great wealth partner will act as a quarterback to ensure all advisors are working in sync toward your long-term financial and lifestyle goals.

Close Your Wealth Gap

Your business is undeniably your biggest asset. However, chances are the “wealth gap” between your business and personal finances is an issue that needs to be solved.

In other words, your business shouldn’t be your only asset. It’s best to have more than one horse pulling your wagon, especially when unexpected market changes (think Covid, the Great Recession, tech bubble) can affect or even destroy your business. It’s wise to diversify to ensure you can weather an unexpected financial storm.

Many business owners don’t realize they have access to a unique set of playbooks when it comes to tax planning strategies. Taking advantage of these can help shift some wealth out of the business and into your personal finances without impacting business operations or the company budget. The goal should be two-fold: to optimize your business taxes as well as your own.

For example, stacking retirement plans can function as a top line deduction that increases liquidity and funds your retirement bucket. These come in many different flavors, including defined benefit plans, cash balance plans, and more. Taking advantage of tax code provisions around qualified small business stock (QSBS) is another approach that can spread out small business ownership and exclude up to $10 million in gains from taxes when the shares of stock are sold. However, these two examples can involve many administrative hoops and regulations to account for, and retirement plans in particular may require significant and reliable free cash flows. You may even have to restructure your business in order to line everything up.

This is why I always recommend working with a tax attorney and wealth manager early-on. Rather than being pulled away from your business to sort out the complexities, experts in these areas can seek out these opportunities and advise you along the way.

Invest in Yourself

If you find yourself doing everything you can to keep the wheels on your business right now, you won’t be able to maintain that high speed forever. White-knuckling it will only work for a short time before you reach a point of burn out.

Think about the old adage, to put on your own oxygen mask first before helping others. The same is true in business when planning your exit strategy. In order to show up fully, lead your team, and pull off the big decisions, you’ll need to be operating at your best. This means taking downtime to rest and recharge.

I always recommend taking a bare minimum of 104 days off every year. Does this number seem oddly specific? That’s because there are 52 weeks in a year and 2 days of weekend every week, which equals 104 days.

The moral of the story is: take your weekends off, disconnect from the business, rest, and spend time with family and friends. If you can take additional days off outside of the weekends, even better. By the same token, look into allocating money to fund your lifestyle today. While you still want to be responsible with where you invest your time and money, it’s also important to enjoy your life now.

This may seem like an impossible dream early on, but as you build a trusted team of partners and consultants–both inside and outside the company–it is possible. By offloading the tasks you enjoy the least and working on your wealth plan now, you may even find yourself enjoying business ownership more than you thought was possible.

Remember – Exit Planning is a Team Sport

Set yourself up for a successful business exit by enlisting the help of a business advisor, wealth manager, and tax attorney early-on. With this team in place, you can confidently run your business with an exit in mind and do so on your own terms and timeline. This way, when the time inevitably comes, you’ll be successfully set-up to fund and live your dream lifestyle—the one you’ve worked so hard to achieve!

This article was contributed by Greg Maddox, Senior Business and Exit Advisor at Cultivate Advisors

Business Exit Planning is a Team Sport

Listen to the 3-Part Series with Greg Maddox from Cultivate Advisors.

 

If Your Business Had a Health Check-up, What Would it Say?

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