September 17, 2017

9 Key Mistakes Owners Make When Exiting Their Small Business

Over 48 percent of the owners of privately-held businesses say they expect to have a change in ownership within the next 5 years. 75% plan to transition over the next 10 years*. Eighty present of businesses never exit when they try to sell, and of those that do, 75% of the owners profoundly regret the sale a year after the event. These are sad, sobering facts. It doesn’t need to be that way.

Here are some of the reasons business owners either don’t exit their business, or exit in a way that leaves the owner (or his/her family, co-workers, suppliers and customers) full of regret.

1. Waiting Too Long to Exit

It’s better to exit your business at certain times than others. This might be based on the overall economy or forecasts, but may also be driven by where your products are in their evolution, what is happening with competitors, and what is happening in your market space. Or, more dramatically, it may have to do with the owner’s personal or health situation.

When the company is growing and doing well, it’s easy to ask “Why would I exit now?” Yet this might be the best time to prepare your company for sale or transfer. That’s why it important to watch closely the M&A activity in your industry, your competitors’ activity, the overall market for your products, and your realistic pipeline for new products and customers.

Along with the need to prepare your company for sale, is the need to be ready to take the plunge if an unexpected strong offer comes along. But be sure it really is a strong offer. Get a preliminary valuation Make sure you are being honest with yourself about your emotional readiness to leave the business or to be engaged with the business in a totally different way – you may leave a lot of money on the table, or find that you have all the money in the world, but are very unhappy soon after. One offer or buyer is many times no good offer and no good buyer. Make sure you are thoroughly prepared before moving forward on what you think is a strong offer for your business.

More alarming, the most common reasons business owners’ exit their business are (1) death; (2) disability, or (3) divorce. In each of these cases, the business owner often is completely unprepared for the exit, and may have very limited options. In the saddest cases, the owner leaves his/her loved ones to try to deal with the issues as best they can.

You owe it to yourself and to those you care about to exit your business carefully and with proper planning - it truly is a once in a lifetime event for most owners.

2. Kidding Yourself About Your Readiness to Exit 

Many businesses never transfer with proper exit planning because their owners haven’t really done the necessary soul-searching. It may seem strange to talk about psychology in the context of a business transfer, but it’s critical – whether transferring the business to a third party, to employees, or to a family member, the process is often time-consuming and involves delicate negotiations. No one wants to invest time and resources in the process of taking over a business if they aren't absolutely convinced the owner(s) want to exit.

Similarly, business owners who have mixed feelings about exiting their business and haven’t fully resolved these issues inevitably send subtle signals to potential buyers/transferees, and this makes negotiations more difficult and greatly increase the likelihood that the deal will come apart (or, in the case of a sale, may cause the potential buyer to decide not to make an offer at all).

It’s critical for business owners to address feelings of loss – whether loss of the business itself, the fear of loss of stature in the community, loss of identity or purpose, loss of social structure, or loss of financial and emotional perks – before the business is prepared for exit. Because owners are often so close to the business, they may need outside, unbiased advice to help them through this phase.

Key to this process is envisioning life without your business and exploring how you’d like to contribute to the next phase of your life. For most business owners, it’s impossible to deal with the feelings of loss and disorientation without having a clear vision of where you’re headed next. Many business owners are so involved in running their business that they don’t take time to inventory their many skills and areas of expertise, as well as things they’ve always wanted to learn about or do. A certified exit planning advisor is trained to work with owners to help them get true clarity on the life they truly want to lead, explore options and develop a plan to find that life. 

3. The Business is Too Owner-Centric

If you as owner are feeling pulled in lots of directions and reaching a point where it seems the business’ growth is limited, it may be because you are too involved in the business. Most business owners are extremely proud of the business they have built, but at some point, it's important to recognize that the growth of the business may be stunted if you continue to remain at the center of all the decisions.

Many owners recognize this and choose to remain as the hub in the spoke of their business because there is nothing else they can think of that will bring them the same joy. This is certainly a deeply individual choice, but it is a choice. And owners making that choice will find it difficult (or worse, their family later will find it nearly impossible) to exit the business in a way that preserves the full value of the business. Certainly, it will not sell for the kind of price it might have if the owner gradually exited the business and had a plan in place for it to run without him/her.

To capitalize on the full value of your business, you’ll need to develop and implement a sound, comprehensive exit plan that provides for a step-by-by step exit of the business, including a plan for you to either make it less owner-centric, or one that acknowledges that you will need to stay on for an extended period of time..

4. Picking the Wrong Advisors or Trying to Do it Yourself

There are lots of advisors out there, and most of them aren’t right for you. You need to seek out a team of advisors that have plenty of experience with the type of transaction you're planning. 

The lawyer who has helped you for years with your contracts, employment issues, and day-to-day legal issues isn’t the lawyer who should be helping you if you’re looking to exit to an outside buyer. It’s unlikely they have the right experience, and they can lead to many problems in structuring, negotiating, and closing your transaction. In that situation, you’re looking for an experienced “deal lawyer” who focuses on M&A transactions. If you’re considering an ESOP, you need a lawyer with plenty of experience in this complicated legal area.

Your accountant or normal tax advisor shouldn’t be engaged to do your business valuation or review your books and records to identify things to shore up – even if they offer these services, they have an inherent conflict of interest in defending past decisions made with you.

If you’re thinking of selling to a third party, don’t sign on with the first business broker or M&A firm who contacts you or that you talk to, and be especially careful if they magically have “just the right” buyer for you. Companies with $2 million or less in revenues are generally best-served by a business broker with experience in their industry. Those with higher revenues often find an experienced M&A firm in their target market better-positioned to help. Look for advisors who ask YOU lots of probing questions, and suggest several different prospects for you to meet with.

Ask your advisors, peers, and industry groups for referrals (or ask your exit planning advisor for recommendations), and interview them to find one who you feel comfortable with and has a proven track record of successful deals in your industry, with your company size, and your type of transaction. These advisors will provide invaluable assistance in smoothing out the inevitable bumps in the transaction, and already have a powerful network of connections to tap into for any specific issues that need to be addressed. Ask your short list for references, and follow up with them. If you don't like anything you hear, move on - there are plenty of excellent advisors, and there are ones just right for you out there. 

5. Unrealistic Asking Price

Many companies never exit because the owner(s) are convinced the business is worth more than the potential buyers are willing to pay. If you don’t have a good idea what your company is worth before you start the process, you’ll either exit for too little and leave a lot of money on the table, or cause negotiations to fall apart because they believe you’re not serious if your price is unreasonably high.

The best way to get a realistic picture of your business’s likely selling price is to have a valuation done by a qualified professional – even a quick valuation will at least give you a price range, and is well worth the modest price. The next step is to work with a certified exit planner to explore ways to increase your valuation. Valuation is based on many factors, and most businesses are able increase their valuation by making changes – some difficult, but some amazingly simple. The exit planning process is designed to identify those opportunities, help you determine the return on each investment, and help you systematically implement agreed upon changes.

You may in the end choose not to take any business value enhancement steps, but at least you will be able to plan your financial future and negotiate the sale of your business from a position of knowledge, including understanding what your business could be worth, and a realistic picture of what a third party is likely to offer you today.

6. Lack of Preparation 

The optimum exit of a business often takes 3-5 years of preparation. Too many owners don’t plan ahead and instead, come to advisors only when they are anxious to exit. Exiting your business with this approach virtually guarantees you won’t get the best price and that you will have fewer exit options.

It’s important to have advisors who can help you truly understand the market, look realistically at your business, offer you options and trade-offs, and then work with you to develop and implement a plan to make the changes in your business that are worthwhile and fit within your time horizon.

For example, if your business is highly dependent on one or two customers or one or two suppliers, your company’s current valuation will suffer. A certified exit planner will help you create a plan to diversify your supplier or customer base, which takes time but almost certainly will increase your valuation.

Other owners may decide that they need to exit sooner, but a good advisor team can help the owner understand a realistic current valuation, increasing the likelihood that the business will be exited from. This also allows the owner and his/her family to make better personal financial and estate plans.

Owners’ lack of preparation may also mean that they are unprepared to exit the business when a good offer comes along. It takes time to get an objective assessment of your business, its strengths and weaknesses, and your options for sale. You may have several options available, such as an ESOP (Employee Stock Option Program), recapitalization, or adding an equity partner. 

7. Lack of Agreement among the Company's Stakeholders

Sometimes the president/founder is only a part-owner in the business. The last thing a potential buyer wants is to spend lots of time and money helping sort out internal disputes or disagreements among the various stakeholders.

Sometimes, conflicts occur because the board or other shareholders want to exit (or demand the sale), but the president/part-owner does not want to. Sometimes friends or family members own part of the business, and they want out at a time when the business is strapped for cash. Sometimes these issues are merely a reflection of much deeper family conflicts that may require outside assistance to mediate.

Identifying and helping resolve all internal disputes among your stakeholders is part of a well-plan business exit. A good practice is to implement a well-crafted buy-exit or stock redemption agreement among shareholders early in the business’ development, and at the very least, well in advance of any contemplated exit. Buy-sell agreements should be reviewed regularly to make sure they still reflect the wishes of the shareholders as the business evolves and the shareholder’s personal situations evolve.

8. Not Understanding What Buyers are Looking For

For business owners who have not been through multiple purchases and sales of businesses, the M&A process can be overwhelming. In part, this happens because owners are so deeply involved and emotionally tied to the business that they often need advisors to help them see the options and buyer’s perspectives rationally. 

Other issues that cause disconnects between owners and potential buyers include:

  •   failure to provide enough data; failure to adjust financials to reflect the way an independently- run company would look like
  •   taking the transfer negotiations too personally
  •   failure to think through the buyer’s issues related to post-close integration
  •   unwillingness to consider earn-outs or extended owner involvement in the business 

The M&A world has its own language. A good advisor can help you break down the process into clear, understandable steps in everyday language. They know how certain buyers (and even certain personalities) are likely to negotiate, and can ensure the process goes more smoothly.

9. Surprising Buyers with Bad News

Negative news or “skeletons in the closet” are never helpful, especially late in the deal process. Discovery of these issues may lead a potential buyer/transferee to wonder just what else you’ve failed to disclose about the business.

A good team of advisors can help you put together a good “data room” (where key information about the business is gathered), as well as a realistic but positive “book” or selling memorandum (a summary of the business’s strong and weak points). The process of assembling these critical pieces can be time-consuming and an experienced professional can provide invaluable assistance with this phase.

Too often business owners fail to plan ahead and to address critical issues well in advance of their business exit. Involving a Certified Exit Planner Advisor ensures that these issues are raised, and typically results in a very handsome return on investment. In addition, the process brings deep satisfaction and peace of mind for most business owners and their families. Owners who fail to plan properly often exit their company while leaving millions of dollars on the table and having unfulfilled goals and objectives..