Eight Exit Planning Mistakes & How to Avoid Them
Exit planning is a roadmap that’s created to plan your eventual exit from your business. It ensures all your ducks are in a row before you sell or secede the business. This roadmap includes the tax, financial, personal, business, legal, estate planning, and family components of your plan. Starting at least three to five years before you want to exit gives your exit planning team (your “e-team”) time to prepare with the most benefits and options for you while you make sure your business is exit ready. However, too many business owners (68%) have spent little to no time on their exit plans, and 75% say they have seller’s remorse.
So, how do you avoid the biggest exit planning mistakes and be personally, professionally, and financially ready to exit your business whenever that time comes? Keep reading to learn more.
12 Steps Every Exit Plan Should Address
Eight Common Mistakes People Make When Exit Planning
#1: Not giving yourself enough time to plan properly.
Waiting until 6–9 months before you are ready to sell to prepare your business for an exit limits your options and usually lowers the dollar amount you will get for your business. Starting the process at least five years before you exit offers:
- the most flexibility
- the highest income
- the best transition (both for you and the business)
If you plan to exit sooner than three to five years, that’s okay, we may just have fewer tools in our toolbelt to provide optimal results. Start the process as soon as you can.
#2: Waiting to sell until the business is in late maturity stage.
Don’t wait until your business is on the downward slope to exit. Typically, by then, sales have decreased, staff are leaving, and the business is no longer at its peak for interested buyers or family members to take over a struggling business. The best time to sell the business is at the top third of the upward trend. Many businesses can increase the height and length of the upward trend by having an exit-ready business. For more about creating an exit-ready business, read our blog article, Why do I Need an Exit-Ready Business?
#3: Not bringing in the professionals early.
Exit planning mistake number three is not getting the professional advice you need from tax, financial, legal, and estate planning professionals soon enough in the process. By talking with these professionals well in advance and creating your e-team, you can give yourself more options and often minimize your tax consequences upon exiting. It also helps make sure the business sale or succession is set up correctly. This also allows for greater estate planning options. Working with your financial planner helps us better understand how much will be needed to fund the next chapter of our lives.
#4: Taking friends’ advice.
Talking with a friend about how he or she exited their business and assuming that is the best way for you to exit yours is a big mistake. Your business and industry are unique, you have a unique financial situation, and you have your own goals. Make sure you are optimizing every facet of the outcome.
#5: Not planning for what comes next, after exiting.
For most business owners, the business has been the primary focus for years. Sometimes, this is what keeps an owner from starting the exit planning process in the first place. They are scared about what or who they will become after the business. Not planning for an exit is less daunting. However, planning for your post-business future is a very important part of the exit planning journey. IGX works with you (or we bring in the professionals you need) to develop your “what next?” plan. You should be excited about the next phase, and you can be with the right guidance.
#6: Not knowing what the business is truly worth and how much will you keep.
Believing the business is worth more than it’s truly worth, and not having a clear understanding of how much money you will have left after the exit and after taxes is a costly mistake. It’s important to get a good understanding of what the business is worth now, what the tax consequences will be, and how much will be left over after you exit. You don’t want to be left short in the next phase of life’s journey.
By knowing these figures early, we have time to adjust your plan as necessary. It is not unusual to increase the value of a business 3–5 times within 1–3 years when working to become exit ready. Find out what the actual numbers are so you can make smart decisions.
#7: Not refreshing and revitalizing the team.
Worrying that staff will leave if they know you are creating an exit-ready business may be what’s keeping you from exit planning. However, part of building an exit-ready business is developing your management and leadership team. A recent study showed 94% of employers surveyed report that having a succession plan in place for their management team positively impacts their employees’ engagement levels. People want to know what growth is possible for them and are eager to be a part of it.
As we start to develop a better foundation for your business, your staff will be excited to step into larger roles with more responsibility and new opportunities. At this stage, a company usually picks up momentum, runs easier, and often, new markets and new customers are acquired. The company gets new life again. Who wouldn’t like that?
#8: Not dealing with the elephant in the room.
Most business owners are convinced there are one or two reasons the business will be hard to sell or transfer to their kids. Others simply never bring up the real reason they won’t start the exit planning process because it’s touchy. Sound familiar?
Some common reasons include:
- Not believing the son/daughter have the right skills to take over the business.
We give them an assessment so we can provide the skills they need.
- How do we create “fair” when one child wants the business, and the other siblings don’t?
First, we discuss fair versus equal. Next, there are many estate-planning tools to address this. Again, the earlier we start, the more tools are available.
- The business is too reliant on the owner or certain customers. This is a common issue.
Getting your business exit ready addresses this issue.
All these issues and the other elephants in the room need to be addressed for an exit to be successful. Together, we can overcome whatever is holding you back and get that exit plan in place so you can have peace of mind.
Today, it’s exciting to be exit planning because there are now two categories of sellers: those who are exiting to retire, and those who want to grow a business, sell it, and then move on to do it again, or do something entirely different. Regardless of what stage you find yourself in, exit planning is a great way to make sure all your hard work is rewarded. You deserve to exit your way on your terms.
What’s the First Step in the Exit Planning Process?
To get the ball rolling and finally get that exit plan in place, you will need an exit planning advisor’s help. Since there are numerous pieces to the exit planning process puzzle, the sooner you start, the better it is for you to sort through and align the pieces and put the puzzle together. You see, no two exits look alike. You have multiple options that are unique to you and your situation. While that is good, it can be overwhelming. That is why it’s important to have an exit planning advisor who acts as your guide. Someone who understands what you want to accomplish and brings professionals to the table to help create that vision for you.
And you don’t have to be ready to exit now or in five years. You can create an exit plan at any time just in case you need to exit unexpectedly. Some of the plan can be triggered years in advance of the exit for maximum benefit (i.e., establishing an ESOP, buying life insurance, or setting up a trust) and others are triggered at the actual exit. The important part of the process is simply getting started and letting it unfold from there.
IGX Wants to Help You Exit Plan & Make the Most of Your Future
Exit planning is complex and there is too much at stake – your business, your future, and your finances – to try to do it without the help of experts. IGX would love to be your exit planning advisor and help you make the most of your future! Simply reach out for a no-obligation conversation today to learn more. We look forward to meeting you.