1.   Flying Blind

Many owners fly blind at this most critical time in their business career.  Their approach to the multiple decisions involved with a business transfer is largely improvised and reactive.  Unrealistic assumptions, wishful thinking and emotionalism dangerously influence their actions.  No planning, poor planning and inadequate preparation are the most common and fundamental mistakes Exiting owners make.        Suggestions: Start with a plan and follow-up by appropriate preparation.  How much planning and with what lead-time is impossible to prescribe for all owner situations and businesses. Ask your Primary Business Consultant to help you develop your Exit strategy well in advance of a contemplated sale.  Allow enough time to complete prudent preparations, such as cleaning up the balance sheet, settling outstanding litigation, addressing environmental or regulatory issues that might become deal killers, negotiating leases, and disposing of excess assets.

Randall Oestreicher, PBC, PhD

2.   Going it alone or on bad advice

For most Exiting entrepreneurs the transfer of business ownership is a one-time experience.  Considering the tremendous monetary and lifestyle consequences that it has for both the owner and family members the need to get it right should be obvious.  Those inclined to self help generally can’t see the risks and limitations of going it alone. Costly, hard-dollar mistakes, and even outright failure, can be traced to an owner’s inability to distinguish good advice from bad, an ethical professional from a self-serving “want-to-be”, or simply an unwillingness to value and bear the cost of appropriate help that can make all the difference.        Suggestions:  Good, timely professional advice concerning current or future tax liabilities, avoidance of potential litigation, or negotiating the best deal – fair for all parties can save many thousands of dollars.  Less tangible benefits can often be of equal or greater importance: peace of mind, a stable and lasting transfer to the right party, fairness to loyal employees, a timely transition to a desired future, and the avoidance of future litigation.        Put together the best team possible.  Seek and be willing to pay for good advice.  Consider the services of a Primary Business Consultant whose proven ability to work successfully with other professional advisors and understanding of the “big picture” will serve you well.  Choose one who will represent you specifically in this process and most importantly will be your strongest advocate, assuring that you remain in control. Don’t make the mistake of relying exclusively on a trusted advisor who doesn’t have the experience, skills or temperament you need but who may hesitate to admit it because of your friendship.

3.   Exiting for the wrong Reason (s), no good reason or impulsively

False starts occur in situations when an owner goes to market prematurely or otherwise acts to transfer business ownership but is not really ready.  Even if the effort succeeds, it may clash with the owner’s best interests, and rarely will produce optimal results.        When seen as the only solution to chronic frustrations, financial distress, and problems that could have been handled by specific operational, personnel, or financial changes, then Exiting may be for the wrong reason.  A Primary Business Consultant can help deal successfully with the frustrations of poor financial performance, and at the same time, build additional value for the business well in excess of the cost of such assistance. Finally, there is the entrepreneur who impulsively reacts to the approach of a suitor or industry consolidator.  Driven by emotion, ego or fearful that an apparent, window of opportunity will close; he’ll buy into someone else’s Exit plan, realizing later that it wasn’t what he really wanted.         Suggestions:  The first question a prospective purchaser will ask an Exiting owner is “why are you Exiting?”  You need a credible reason!  Focus on your objectives – personal and financial, near-term and longer range.  Explore alternatives, getting the best professional advice. If you are going to follow through an Exit strategy to completion, be sure there is motivation stronger than just putting some money in your pocket.  Some obvious and compelling motivations are:  Retirement Serious Illness Divorce Disability of an owner operator Death of an owner operator Burnout of an owner operator Desire to upgrade one’s status or profession “Grass is Greener”…the allure of a new challenge or “Just having to try something different” Pursuit of a better investment strategy…leveraging into something bigger or more promising Inadequate borrowing capabilities Risk reduction : ending one’s financial and legal exposure to risk         This variety of motivators that validate and drive a commitment to Exiting business ownership will require honest answers to some basic questions:  How strong is my need for a redefined future, retirement, a new challenge, ending my exposure to risk, gifting to heirs or a favorite charity, etc.?  Have I reached the point where I can commit to this course with no turning back?  Am I mentally ready?  Where you have mixed feelings about going forward, talk to others who have been through the process, and you’ll find this is normal.  For some entrepreneurs, determining owner readiness is fairly simple.  For others, a more structured and lengthy process of succession planning or Exit planning will be appropriate.  Through this the entrepreneur will focus and refine his or her priorities, and with expert guidance look at the feasibility of transferring the business to insiders (family members, employees, management, etc.), before any decision to go outside.

4.   Not knowing the market value of your business

Not knowing what your business is worth means not knowing if a contemplated transfer can meet all your financial objectives.  That makes it impossible to determine if the timing is right for you.  Should you press ahead anyway when reacting to a suitor’s approach you are vulnerable in another regard.  Without a benchmark or yardstick, you can’t evaluate the fairness of any offer.  Ignorance of current market value is costly in other ways.  An Exiting entrepreneur may unknowingly under-price his company, potentially leaving significant dollars on the table.  Or, unknowingly pricing your business too high will blow away qualified prospects, prolonging market exposure and increasing the likelihood of a breach of confidentiality.  This is one reason why a number of businesses never transfer, and are closed down with the assets liquidated for pennies on the dollar.        Suggestions:  Getting an appraisal by an independent, experienced, third-party professional is the only way to determine business readiness or whether the business is likely to command the price, and produce the proceeds the Exiting entrepreneur needs.  Experience shows that a formal opinion of value from a respected, independent third-party can put you in control.

5.  Failing to consider the tax consequences of a contemplated transfer or doing so too late

Often an Exiting owner completes negotiations only to discover that due to his tax situation he can’t afford to Exit.  Sometimes a creative solution may be quickly found.  More commonly, the tax-bite issue either becomes a deal-killer or the anxious owner afraid he will lose the purchaser sees no choice but to pay.         Suggestions:  Don’t focus on expected price alone.  Net, net, net is the issue.  After getting a professional, third party appraisal, allow your Primary Business Consultant to consult a CPA or tax advisor early enough to identify tax strategies that will minimize, defer, or possibly avoid a substantial tax liability.      Warning:  If, after an appraisal and tax planning, it is evident that the anticipated net proceeds won’t meet the Exiting owner’s financial needs, do not make the mistake of adjusting up the offering price of the business.  Rather than putting the business on the market at an unrealistically, high price to satisfy owner needs, engage the services of a Primary Business Consultant to legitimately increase the value of the business over the required period of time.

5 More Mistakes to Avoid will be reviewed in our next issue.

<<Click here>> to download a printable copy of this article. ***This is an edited version of Ch.10 Common Mistakes which Mr. Oestreicher contributed to the book: E4: Evaluating, Entering, Enhancing, and Exiting Privately Owned Businesses, authored by William W. Bumstead (2002).