How NOT to leave your business (Part 1)

Successful and unsuccessful business transitions

Over 70% of business owners have the majority of their wealth tied up in their business. Therefore, it’s critical to sell your business for the best possible price to provide funds for your retirement and for future generations. Business owners often leave their business unsuccessfully, usually through a lack of planning. It is important to carefully plan your transition to achieve the best outcome, both financially and personally, and to get a fair price for your business. When done properly, you can set yourself up for retirement.

To clarify our terminology – as we’ll see shortly, a business transition involves exiting your business – often referred to as business succession  – and personally transitioning to the next stage of life.

In this two-part blog, we will examine –

  • what a successful business transition looks like;
  • what can prevent a successful transition;
  • some examples of how not to transition; and
  • finally, what you need to do to sell your business successfully.

What does a successful transition look like?

A successful business transition means that –

  1. you have a clear plan now for what you want to do with your life after leaving your business;
  2. you pass your business on to a new owner so that:
    • you come away with the money you want;
    • the business continues successfully after you leave; and
    • you can successfully live the happy and healthy new life you have designed.

What can prevent a successful transition?

There are a number of factors which can prevent a successful transition. These include:

  1. a lack of information about what to expect, and about your options;
  2. unresolved emotions and fears about the process and your life after business;
  3. limited thinking about your future possibilities;
  4. lack of a clear vision for your future;
  5. lack of clear goals for your personal and business future;
  6. lack of a plan for how to achieve your goals; and
  7. lack of professional advisors’ support.

How not to transition

Often, business owners are not conscious of the impediments to a successful transition from their business to retirement. To help you become more conscious of them, here is a list of things to avoid if you are a business owner selling your business and transitioning into retirement.

Repression and denial

Often business owners don’t want to think about leaving their business or professional lives behind them. This causes them to avoid the subject and not plan ahead. Doing nothing makes the business owner vulnerable when an unexpected event occurs. It is also likely to impact on the price you will receive for the business – affecting your retirement plans and the wealth you have available to pass on to future generations.

Leaving involuntarily

A business owner who is forced to leave work involuntary, perhaps due to illness or the need to care for a spouse, without previously planning their exit, will most likely not receive the best possible value for their business. This will also affect the business owner and their family and employees.

Making an impulsive decision

After many years as a business owner, some reach a stage where they suddenly decide that they cannot continue in the business or profession. They make an impulsive decision and sell or, worse, simply close the doors. This decision could be triggered by any number of external events, personal financial or otherwise. By making an impulsive decision without having properly planned for the exit from their business, the business owner is unlikely to realise the true value of their business and will lose money in the process of selling.

Owner’s indecision

Owners indecision refers to owners who think they may want to sell their business, but they’re really not sure. They may approach their accountant or other advisors about selling the business, but then change their minds and decide not to sell.

An owner who continues to play with the idea of selling their business without actually following through is just as bad as the business owner who makes an impulsive decision. Many advisors become exasperated by business owners who say they want to sell but don’t follow through. These advisors are realising that these clients are not emotionally ready to leave the business and so are more selective with who they choose as clients.

Many business brokers now encourage their clients to undertake a transition planning process before they become engaged in the process of selling the business. It is in the advisor’s best interests – they want to make sure the client is serious before spending their time on a project, and is likely to save the client money in the long term.

Seller’s remorse

This can be similar to owner’s indecision.  Seller’s remorse occurs when a business owner has instructed their broker to find a buyer, and as negotiations are underway, the seller decides not to follow though with the sale. Alternatively, the business owner might consciously or subconsciously take steps to undermine the sale. Business intermediaries and buyers, wary of this common occurrence, are often insisting on a penalty for sellers who pull out partway through a transaction.

“One business broker recently told me of a client who instructed him to sell his business, as long as he received $7.5 million for it. This was above market; however the broker managed to find a committed buyer at $10.6 million. When the broker told the client, the client decided they didn’t want to sell! You can imagine how frustrated and annoyed the business broker was to have wasted their time for a client who was clearly not ready to sell in the first place! Of course, the client may not have been consciously aware of this – they may have thought they were ready to sell, but could not bring themselves to do so when it came to the crunch.”

Peter McKnoulty (Transition Planning Founder and Consultant)

Just closing the doors!

I have been amazed at the number of long time business owners who have done nothing to plan to exit their business, and are simply intending to close the doors. Here are just two examples –

  1. I spoke to a liquidator recently who was in the process of liquidating a successful manufacturing business. The owners had reached retirement age but had done nothing about selling the business – and so they were simply liquidating it! There were over 100 employees who would soon be out of a job; and
  2. A “friend of a friend”, John (not his real name), has operated a successful second-generation building products business for many years; it has provided John and his family with a very comfortable lifestyle. He plans to just close the doors in a year or two, because he hasn’t done anything about business succession. My wife recently suggested that John talk to me about his business succession options. John’s response was “I can’t afford to speak to Peter”, to which my wife replied “John, you can’t afford not to”. I intend to reach out to John – stay tuned!

In part two of this blog, we will continue to explore some traps to avoid in leaving your business, and then outline what is required for a successful business transition.

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