5 Reasons Why You’re Not Creating an Exit Plan for Your Business
When you retire, what do you want to do with your business? Sell it for a handsome profit, or perhaps hand it off to your grateful children, who will nurture it and make it even more successful? Of course, if you’re planning on retiring within the next ten years, you already have a comprehensive, adaptable, plan that’s been updated annually and vetted by your accountant, lawyer and exit planner. Your partners, shareholders and heirs are all on board and prepared for every contingency.
Or… perhaps not.
If you’re anything like the average Canadian business owner, chances are you don’t have any formal plans drawn up whatsoever. In future articles I’ll go into detail as to why this is the most costly mistake most entrepreneurs will ever make in their lives—we’re talking hundreds of thousands, if not millions of dollars—but for now, let’s take a look at why so few of you are diligently and strategically planning your exit:
- You’re Too Busy. I hear this one a lot, and many studies confirm this is one of the most common reasons for not planning. Hey, I get it--as an entrepreneur myself, I understand all too well the demands on your time. When day-to-day operations eat up all the hours in your week, when are you supposed to sit down to hammer out a plan that you won’t be using for years? However, believe me when I say you absolutely must find the time.
- You’re Not Sure Where to Start. Exit planning is tricky, and if you’ve looked into it at all, you’ve seen how complicated it can be and how many ways you can go wrong with it. And the consequences (legal, financial, familial) can be pretty severe if you get it wrong. Who wants to deal with something that overwhelming? A typical human response is to avoid it like the plague. I strongly suggest consulting with an experienced exit planning professional who can guide you through this process.
- You’re Not Ready to Consider Retirement. I’ve written about this topic before and have encountered this mindset with countless numbers of my clients over the years. Your identity is your business, so how can you imagine your life without it, and plan for other people to take over something that is such a big part of who you are? Nonetheless, you must start planning for life after business, to ensure the best possible outcome for yourself and your loved ones.
- You Need to Build Value First. I applaud you for this one, because you owe it to yourself to make your business all it can be before you sell (or hand it off) to maximize the return on your investment, and generously fund your retirement. Value-enhancement is the cornerstone of every solid exit plan. If you’re within ten years of retiring, this is where the majority of your time should be invested. But there are several other crucial factors you need to address as well, and a professional exit planner can make sure you’re dealing with every one of them. This is not an event, but rather a sequential process we work with clients over time.
- You’re Using Your Business to Save for Retirement. Sure, you want to use your monthly business income to pay off your mortgage, contribute as much as possible to your RRSPs and build your portfolio. But chances are, your business is worth significantly more than your RRSPs or your home. Rather than focusing your energy on day-to-day business management, it would likely serve you better to hand off operational tasks to someone else while you focus on adding value and reducing risk so you can sell for maximum profit and fund your retirement much sooner.
Let me reassure you again, I understand all of these (and variations of the above) reasons for not having a solid exit strategy yet. But I want you to understand why it’s absolutely critical to have one. Chances are you already know, and just don’t want to think about the fact that people who don’t make a plan generally lose their business to one of the five D’s: death, divorce, disability, distress or disagreement. Which means you (or your heirs) will likely get a fraction of what your business could be worth. This is a tragic, but all-too-common scenario I’d like to see you avoid, so please start planning your exit strategy today.