Exit Planning Excuses
Dr. Paul J. Pavlik, September 15, 2020
Expect the best. Prepare for the worst. Capitalize on what comes. – Zig Ziglar
First, I would like to thank Mr. Ken Stiefler at eXITS, LLC (an exit strategy think tank in Denver, CO) for graciously allowing me to present this article that he published for his clients on February 17, 2015. This article was originally written by Mr. John Brown and his team at BEI (Business Enterprise Institute). Mr. Stiefler and Mr. Brown’s contact information can be found at the end of this newsletter.
This article introduces the extremely important idea of preparing your business for an exit (sale) at some point in the near or distant future. Since I experienced a dentist career-ending disability, without warning, several years ago, I am very familiar with why an owner needs to BE PREPARED to sell at any time. Anyone interested in selling a business (practice) in the near or distant future, anyone who has a need to know the value of a business for reasons such as preparing a business plan, requesting a bank loan, preparing for a divorce, or anyone wanting to buy a business should learn how to put a value on the business, how to improve the value drivers that can increase value, and how to monitor, measure, evaluate, and then, adjust operations so that the business increases in value.
The following discussion only briefly touches the surface of understanding the depth and importance of planning now for how to prepare for a future “exit” from your business (more to come in future newsletters). If you would like to discuss this in-depth, email me at email@example.com; we can then schedule a time to discuss your particular situation and questions.
(My personal thoughts have been added to make the article more relevant to healthcare professionals.)
Like every owner, you will one day exit your business—voluntarily or involuntarily. On that day you will want to attain certain business and personal objectives: the first (and usually prerequisite to all others) is financial security.
Believe it or not, most owners do absolutely nothing to consciously plan and systematically move toward that all-important goal. Anecdotally, the four most common excuses owners use to justify delaying and eventually ignoring Exit Planning are:
- The business isn’t worth enough to meet my financial needs. When it is, that’s when I’ll think about leaving [selling].
- I will be required to work years for a new owner.
- I don’t need to plan. When the business is ready a buyer will find me.
- This business is my life! I can’t imagine my life without it!
Today, let’s look at the first hurdle that prevents most owners from making the necessary plans to cash out of their businesses and move on to the next stage of their lives.
Excuse #1: It makes no sense to start planning when my business isn’t worth enough to meet my financial needs. When it is, that’s when I’ll think about leaving.
This is a common, and not unreasonable, assumption: Why spend time, effort and money to plan to leave your business when, today, you can’t? Why not wait until it is at least theoretically possible to leave to begin the exiting process? [Unexpected things can happen, e.g., career-ending disability, divorce, death, etc. You should plan on at least having a value placed on your business at any time in your career. In addition, you should constantly strive, over the lifetime of your career, to continue to add value drivers to your business that will result in it being worth more. In the meantime, every business has value starting with the inception of the business due to tangible assets needed to operate the business, e.g., equipment, supplies, furniture, etc. that has value and can be sold if an emergency occurs – i.e., there is always some value in your business].
At age 45, Jerome Rowling was dreaming of the day he could leave his company. The past five years that Jerry had spent trimming fat, watching every dime and developing new marketing strategies on a shoestring had taken their toll. Like the trooper he was, Jerry kept his nose to the grindstone fully confident that if he worked hard enough, the exit he dreamed of would take care of itself.
Fast forward five more years and we find Jerry pretty much where we left him—dreaming more frequently, but doing nothing, about the day he will walk out the door. What had changed was that Jerry had reached his 50th birthday—a benchmark he had set years earlier—for the day he’d leave the business behind.
During the five years Jerry spent working in (rather than on) his business, he missed the opportunity to [all of these points should be considered and put into play from day 1]:
- Clearly establish his personal exit goals and objectives.
- Create an exit plan (based on his goals) that would identify the most productive actions he could take to create and protect value, and to do so in the most tax-efficient way possible.
- Drive up business value to the point where he could sell, pay taxes and exit with the amount of cash necessary to achieve financial security.
What owners know to be true, but often fail to act upon, is that growing value usually does not occur unless owners focus their efforts on deliberate actions that move the company measurably toward their goals. [These are the value drivers mentioned above. A few examples include improving your customer base, keeping your equipment current and in good working order, building a strong employee base, keeping accounts receivables to a minimum, developing a strong management team, having a powerful marketing program, etc.] In failing to act on what they know, owners don’t create or implement exit plans and so are never are able to exit on their terms.
Do You Have A Plan?
To avoid planning not only puts your future financial security at risk, it overlooks your company’s need to grow in value—efficiently and quickly—in carefully targeted areas. Growing and protecting value is at the core of Exit Planning [Stressing value drivers again]. To identify where and how to spend precious company resources (your time and money) to make the greatest impact is a key exit planning task. It is just as important as identifying and implementing strategies to minimize current taxes and the tax bill when you transfer your company.
It makes sense to start planning for your eventual exit because you have to plan (and consistently take purposeful actions to implement your plan) if you ever want to exit in today’s (and likely tomorrow’s) economy. The simple reality is that most owners don’t plan and therefore most owners are never able to leave their businesses in style. [Develop a plan to monitor, measure, evaluate, and adjust your operations on a monthly basis].
If you have any questions for Mr. Ken Stiefler, please contact us. We will be happy to provide you with his contact information.
The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial advisor. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial advisor. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.
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