Dingeman Dancer

Four Exit Plan Mistakes for Family Business Owners to Avoid

(0 comments)

Author: Dane Carey

Many of our clients are family business owners—some large, some smaller. There are many similarities, and many differences among this group of clients. But one thing that all family business owners share is the common need for an established and well thought out exit plan. When working with clients on this issue, we have noticed the following four common mistakes made in the exit planning process that often lead to unnecessary frustration, anxiety, and regret:

  1. Waiting too long.

When it comes to exit planning, many family business owners begin the process far too late. In our experience, it is not uncommon for an effective succession plan to take five or more years to complete. Why? Because this process involves many important but distinct components, and it is critical that each is addressed properly in order to have a successful exit.

The key components include: (1) establishing the owner’s objectives; (2)  analyzing the owner’s personal financial needs; (3) developing and nurturing the next generation (family or management) to take over the business; (4) reducing the owner’s involvement; (5) running a sale or ownership transfer process; (6) estate and tax planning; and (7) appropriate legal planning.

To prevent this process from becoming overwhelming, it is important for family business owners to take it one step at a time.

  1. Failing to communicate.

We frequently work with family business owners who mistakenly believe their children will take over the business when they decide to retire. Such individuals make the devastating mistake of not communicating their intentions or sharing their exit plans with anyone. In reality, there are numerous people who might be impacted by a family business owner’s exit plan. These people need to be informed and on the same page for the exit plan to work. Among others, this includes you and your family, your management team, your employees, your customers, your suppliers, and your community.

In addition to open communication, it is also important to be supported by a team of skilled professionals who have experience with exit planning. These advisors will be invaluable since they deal with issues on a daily basis that you will likely only go through once in your life. Your team might include attorneys, accountants, business valuation professionals, wealth planners, bankers, brokers, and counselors.

By talking early and often to your key stakeholders and advisory team members, you will be able to create a viable vision for an exit plan that will best serve all parties involved.

  1. Failing to ask the right questions.

There are many ways to transition a family business to a new owner. In fact, we commonly see business owners who are confused or overwhelmed by their options. To choose the most suitable path, each individual owner needs to consider the following critical questions:

  • What are my objectives in this exit?
  • What are my personal financial needs?
  • How much do I care about legacy?
  • Do I want my children to take over the business?
  • Do I need a quick transition, or do I want to stay involved and exit slowly?

After sorting out big items such as these, the right exit strategy will become more clear and a family business owner can move forward with confidence.

  1. Failing to obtain a business valuation.

Finally, the last major mistake we see family business owners make is not obtaining a business valuation to use as a baseline guide during the exit planning process.

Although it can take many forms, a business valuation is simply a mechanism to tell you how much your business is worth now. We advise family business owners to have valuations performed regularly and to start obtaining them years before they want to exit their company. Here are a few reasons why:

  • If the company’s value is significantly lower than you thought, you might have to put in a few more years to increase the value. Better to know sooner rather than later. Alternatively, if your business is worth more than you thought, that may mean an early retirement.
  • A business valuation will give you insights about what drives business value in the eyes of a buyer. Often times, this is eye-opening for business owners and helps them better-focus their efforts to maximize value.
  • A business valuation starts the gathering of documentation needed for a proper due diligence process, which is helpful if a family business owner is going to sell his or her company. Further, such a valuation is required for tax purposes if a family business owner is gifting equity.

Conclusion

If you do not want your exit plan to become a cautionary tale, make sure you take the proper steps to prevent these common exit planning mistakes. This means taking the following action:

  1. Start your exit planning early.
  2. Talk with your stakeholders and advisory team members about your exit plan and your intentions.
  3. Choose a specific exit strategy based on your objectives and goals.
  4. Obtain a business valuation periodically to improve your business performance and help you measure progress toward your exit plan.

If you have any questions or would like to learn more, please contact any of the business and succession planning attorneys at Dingeman & Dancer. Dane Carey can be reached by phone or email at (231) 929-0500 or dcarey@ddc-law.com.

 

 

Comments

There are currently no comments

New Comment

required

required (not published)

optional

required

required