5 Reasons Why Business Owners Are not Ready for an Exit

By Kresimir Peharda, partner

 

This is one in a series of posts about selling your business.  See http://vestedlaw.com/kresimir-peharda-interview-exit-coach/.

Top 5

Here are the top 5 reasons, based on data from BEI’s 2016 Business Owner Survey:

  1. No written exit plan
  2. No business valuation
  3. No employees available to take over and run the business
  4. No idea how much money they need from a sale/transfer
  5. Not taking any steps to get the sale process going

No exit plan

Only 16% of owners surveyed had a written exit plan.  Like a business plan it is very helpful to have a document that lays out the steps and milestones of the sale process.  Without a plan it is difficult to know who should be doing what and by when.  Furthermore, without a plan it makes it more likely that important items will be overlooked.

No business valuation

A mere 22% of owners had obtained a business valuation.  A business valuation is an estimate of the value of the business based on the work of a third party appraiser.  This is most often an appraisal firm, or an arm of a CPA firm or investment bank.  Without an appraisal, the owner does not know what a realistic sale price might be.

No employees to run the business

Less than 1 in 4 owners had hired an employee and trained them to run the business.  If a buyer decides to buy the business and all of the know-how and relationships reside with the owner, what happens to the business if the owner dies or refuses to help in the transition?  Since it takes time to hire and then train personnel on running the business owners should hire and train their replacements well in advance of the sale.

No idea how much money is needed

Only 27% of owners had determined how much money they needed from a sale.  Not knowing how much money you need reflects a situation where very little estate planning has been done.  Specifically, this means there is a lack of planning that incorporates the sale of the business into the bigger picture.  Engaging a competent estate planning attorney is a critical step in this process.  Ideally, the estate planning attorney is a member of an exit team that includes other professionals.

Not taking any steps

At the time of the survey, 38% of business owners had not taken any steps with regard to a sale of the business.  This means that they had not even told anyone else about their plans.  Ideally, the owner would have calculated how much money is needed, trained employees to run the business, obtained a valuation, prepared an exit plan, and assembled an exit team.

Conclusion

When it comes to selling a business inaction is detrimental because it dramatically reduces the sale price of the business.  It may even jeopardize the ability of the owner to sell to a third party.  Furthermore, a lack of planning makes it more likely that the owner will pay much higher taxes on the sale price than if tax planning had been conducted beforehand.