The primary goal for business owners when they exit their business is to maintain their current lifestyle in retirement, according to the 2022 MassMutual Business Owner Perspectives Study.
This is further evidenced by the fact that nearly two-thirds said that they will exit only when either:
- The right buyer comes along.
- Their future financial security is assured.
When business owners are asked what is keeping them from putting a plan in place for their eventual exit from the business, owners often have two sides to their reasoning.
The first is the idea that the business is their “baby.” This implies that the reason they don’t leave is because they’ll miss running the business or don’t believe anyone else can run it like they do. In fact, according to the research, 62 percent and 52 percent, respectively, shared this reasoning.
However, there’s often another rationale for not leaving the business that is more based on the financial preparedness of the owner. Specifically, fearing they will have to make adjustments financially when they exit and feeling they are ready to exit emotionally but not financially. Almost the same percentages as the “baby” reason above — 60 percent and 48 percent respectively — shared this concern.
Two types of business owners
There are two types of business owners: lifestyle owners and value builders.
A lifestyle owner is comfortable with the state of the business as long as it supports their current lifestyle and meets their income needs for today.
In contrast, the value builder prioritizes growing enterprise value over income, realizing that when business value grows, the income will be there for today and tomorrow. (Business valuation calculator)
In an effort to monetize the business when they exit, value builders know how much it can realistically contribute to their future income, choose an exit strategy that is aligned with their personal financial goals, and take the necessary steps to build a business that is sellable and transferable.
Your exit plan
This is a process that begins and ends with sound exit planning. Unfortunately, only 35 percent of business owners have started this process, and of those who have, only 8 percent completed it, according to the MassMutual research.
Exit planning is a verb — an action. It’s an ongoing, comprehensive process that allows business owners to leave their businesses when they want, for the money they need, and to whomever they choose. Unfortunately, most businesses haven’t seen this process through.
The process of exit planning should address the following:
- Your goals: Identify what you want to get out of the business when you retire, personally and financially. Only 50 percent of the business owners surveyed have identified their future income needs.
- Your management team: Define the steps needed to keep vital, non-owner management in place so that they stay on board through the transition and beyond. Only 34 percent of the business owners surveyed have built a strong management team.
- Your successor(s): Choose who will be taking over for you and outline a plan to ensure that they are properly selected and prepared. Only 33 percent of the business owners surveyed have identified their successor(s).
- The finances: Identify where the funds will come from to buy you out and whether it will be a lump-sum payout, installment sale, etc. Only 20 percent of the business owners surveyed have identified potential buyers.
- The transfer: Determine when and how the transition will take place and what needs to happen leading up to that time. Only 17 percent of the business owners surveyed have established a timeline for exit.
And finally, everything must be documented and communicated to all parties who may be impacted by the plan (family members, key employees, trusted advisors, etc.). Less than half of the business owners surveyed have discussed their exit plan with family members and internal stakeholders. (Related: What financial documentation do I need to sell my business?)
As you develop a plan for your eventual exit from the business, it is important to consider those risks that may impede your ability to step away when you are ready and limit the value you hope to receive from the business. With proper preparedness, you can exit the business on your terms, no matter when that time comes.
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