5 Reasons CEOs Don’t Focus on Exit Planning

According to recent studies, 60% of business owners do not currently have or plan to develop an exit strategy. Because business owners spend a large majority of their time running the business, it’s not surprising that little attention is given to thinking about what will happen to both the business and to them personally once they are ready to move on.

While every CEO has a personal and unique motivation for eventually selling the business, there are five common reasons most do not spend the necessary time to plan accordingly for this event:

The deadlines and intellectual rigors of running the day-to-day of a business can leave little time for anything else. Many owners put off their succession planning to focus on business operations and finding ways to enhance the value of their business through activities such as introducing new sales strategies, cost-cutting and customer diversification. While increasing the value of a business is the vanguard to any M&A transaction, planning for the exit itself is just as vital.

Most business owners know that developing a succession plan is a time-consuming process that can take months, even years, to complete. For an owner within five years of such a transition, it is recommended to begin this process two to three years prior to sale.

Business owners are accustomed to being in control. Planning for the sale of one’s business cannot be divorced from the fact that they will need to relinquish control to another party and move on from something they have managed meticulously over many years.

Concern about losing control might be related to personal reasons or may be purely operational. An business owner may not know what his second act is going to be and may find the idea of not coming to work everyday uncomfortable to think about and plan for. Alternatively, an owner who has been heavily involved in and is still instrumental to the daily operations of a business may be worried about what will happen to the business when he leaves.

Owners have a lot of decisions to make when considering how they want to sell their business and what the financial implications of
those decisions are. There are a number of structures such a transaction can take, a plethora of buyers to consider, and legal, tax and
accounting decisions to take into account.

For example, an owner might consider an asset sale or stock sale. He might consider selling to a strategic buyer or financial buyer. Even if he knows he wants to sell to a financial buyer, choosing to sell to a private equity firm versus a family office represents very different outcomes for the business and the owner alike.

An owner may be subject to various tax liabilities upon the sale of such a large asset, including capital gains, income, gift and estate taxes upon sale. Consulting with and beginning to formulate a deal team including a banker or advisor, lawyer and accountant can help business owners stay organized and account for these types of options and outcomes in their exit plan.

As previously discussed, an exiting business owner must account for who will take the reigns in his absence. When considering who might succeed him, a CEO may take into account the role that senior managers, investors, partners or family members have played in the business thus far.

This is a particularly sensitive area for family-owned businesses which of late have struggled to transfer the businesses within the family. In fact, only about one-third of businesses succeed in passing the business down to the next generation.

Without a clearly defined successor, a buyer may take it upon himself to fill the role or a CEO may be forced to continue on in his role
until a successor is identified. This is a less than ideal outcome for a seller who is either hoping to keep the business “in the family”,
enable his employees growth opportunities and ready to immediately retire.

Many owners may not be mentally or financially prepared to head into their golden years. While many business owners hope to achieve a sale price that provides a sufficient nest egg for them and their family to live off of, some have unrealistic expectations on what they will receive for their business.

Other business owners may not be ready to cash out their emotional equity or associate “retirement” with “being old”. What CEOs need to know is that exit planning is not the end, a great sale can free up a business owner up to pursue another venture, allow him to pass the business to a deserving second generation owner, or if he’s ready, retire and relax.