I applaud the entrepreneurial spirit. They are mavericks in every sense of the word. Navigating unchartered waters, forging ahead and learning as they go. No matter the obstacle, they apply hard work spiced with sheer willpower. And that can bring incredible business success.
Unfortunately, the same spirit that drives incredible business success can be a downfall when exiting a business. The skillset that grew a business is different than the one needed to strategize a business exit.
To help bridge the gap, here are the 9 biggest mistakes entrepreneurs make exiting their business:
1) Inability to Separate the Business from Themselves
For many entrepreneurs, the business has defined them for the better part of their life. It is the baby they sheltered, protected, fought for and raised into adulthood. It is a core piece of their identity.
To successfully navigate an exit, entrepreneurs need to separate their identity from the business. Being too emotionally tied limits the ability to make strategic decisions based on the best interests of the business.
2) Disheveled Books
Many small business books are structured to mitigate taxes. Owners have a system that gets the job done. It’s not the tidiest arrangement, but it gives enough structure to submit to a CPA.
A buyer has very different interests than the IRS. If the books reflect that the business took a near loss, what value does it have? Even if buyers can see beyond the “reduce my tax burden” strategy, the financing department at the bank won’t have the same leniency.
To showcase the value of a business, accounting and records need to be polished. Remember, the books are the main selling point. If they are a mess, a potential buyer has no reason to further inquire about a purchase.
3) No Second Lieutenant
“Can your business thrive without you?”
A small business owner’s ability to answer that question will define their success in selling. If the answer is no, any value the business has leaves with the owner. A buyer will only be purchasing a job, not a thriving enterprise.
Few entrepreneurs can honestly answer yes. Most built the business around themselves as a keystone. Next, they hired staff to execute their ideas. They tend to stray from bringing on additional leadership for fear of creating too many chefs in the kitchen.
Again, this can be a successful strategy in growing a business. But without a qualified second lieutenant to take the helm in their absence, the business value drops drastically.
4) “Do It Yourself” is Standard Operating Procedure
Self-confidence is not an issue with Entrepreneurs. They see any new endeavor as an opportunity to forge ahead, learning as they go. In a long-term play, this trial and error method works well.
The problem comes in recognizing that the majority of entrepreneurs only sell their business once. With retirement hinging on the success, relying on a trial and error strategy becomes overwhelmingly risky. Too much rides on anticipating unforeseen consequences.
To mitigate risk, creating better chances for a successful retirement, seek help from qualified experts. Reluctance to do so has sent more than a few nest eggs to the IRS.
5) Exit Timing
The default exit is structured around when the owner wants to exit. Failure to evaluate if the business is ready for an exit typically ends in the equivalent of pulling the tracks out from under a moving train. Costly, tragic and catastrophic.
Timing is everything. If the goal is to exit at a certain stage of life, there needs to be preparation for that moment. Goals need to be identified. Systems need to be established. Leadership needs to be trained.
Depending on the type of business, desired goals and price point, businesses can take 1-3 years to develop and implement an exit strategy.
6) Qualified Advisors
One wouldn’t hire a divorce lawyer to represent an IRS case.
A similar mentality is needed when approaching a transition. Advisors for an exit differ than those used for the business day to day. Current service providers are tailored to the operational side of your business. For the exit phase, tax, legal, financial planning and consultants should specialize in transactional work.
7) Accurate Business Value
Evaluating a business is no easy task. It’s made even more challenging when someone is emotionally tied to it. Many business owners let emotions drive their view of the business’s financial worth. Typically, this results in a number twice that of the real value.
8) Understanding the Buyer
The first mistake with sellers is having the idea that “everyone will want my business.” In reality, there is a specific and slightly limited market.
The second mistake is not understanding that there are different types of buyers. Each variant of buyer will approach terms, pricing and deal structures differently. Marketing the business will need to reflect this, appealing to the ideal buyer.
9) Tax Consequences
There is a large discrepancy between sale price and after-tax cash in the bank. The difference is the Tax Man, and he is a mean bedfellow. The majority of business owners don’t understand the colossal tax consequences they are signing themselves up for when they structure their terms. It is essential that all business sales be set up to minimize tax hits.
The good news is that there are business owners who have triumphantly exited their business. They employed the use of qualified counsel who maneuvered them through the exit, avoiding the many downfalls waiting transitioning entrepreneurs.
If you want a roadmap to successfully navigating a profitable business exit, contact us today.