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The Importance of Exit Planning for Entrepreneurs

Unsurprisingly, most entrepreneurs would find it a stretch to add the words “exit planning” to their everyday vocabulary, much less to their long-term business strategy. This isn’t necessarily a bad thing, however, as entrepreneurs are well-known for being focused in the way they operate professionally, looking more towards future successes than the prospect of a forthcoming exit.

It’s the very nature of the entrepreneur that originally provided enough initiative and determination to begin their long walk down the path of business ownership. But it’s this same entrepreneurial spirit that can, at times, get in the way of making sensible decisions regarding the future of their organization.

Plan for the successful exit of your businessWhat is Exit Planning?

While the name broadly implies its definition, exit planning can be summed up rather simply. Essentially, it is the strategic groundwork prepared by an entrepreneur who wants to capitalize on the enterprise value of their small business when a mergers acquisitions transaction occurs, and thereby strengthen the exiting entrepreneur’s shareholder value.

Yet, beyond financial objectives, there are non-financial points that are addressed during an exit planning strategy, including who will become the successor after the entrepreneur’s exit or if there will be altruistic endeavors involved.

The Implications of Not Having an Exit Plan

It’s not uncommon for entrepreneurs to begin planning their exit strategy ten years in advance, knowing that by planning early, they are setting their business up for continued success. If an exit plan is overlooked, however, or hurriedly organized after the untimely death or incapacitation of the owner or founder, everything that the business has already achieved can suddenly be lost.

Speaking to this point, a whitepaper published by Plan for Transition on The Psychology of Exits – Moving Owners to Action, presents the challenges advisors have in prompting business owners to begin planning their exit strategies, as well as the painful, but largely unavoidable results.

Advisors to small to medium business owners know the grim statistics and high cost that is paid through destruction of wealth and legacy when business owners fail to plan for their inevitable exit. Despite years of providing wise counsel, data, and skilled technical advice, advisors are no closer to moving 67% their owner clients to action.

Going into great detail on why small business owners are reluctant to plan for their exit, the whitepaper calls attention to the psychological makeup of entrepreneurs, noting that the very behaviors driving an entrepreneur to be successful are also getting in the way of arranging a rewarding exit strategy.

These include:

  • Risk taking propensity
  • High innovativeness
  • Need for achievement
  • Tolerance for ambiguity
  • Need for control

On our radio show, we discussed these behaviors in depth with Allie Harding, who is a partner at Plan for Transition and Orange Kiwi, on an episode called Mind the Gap: Entrepreneurs Are Wired to Avoid Exit Planning.

Knowing that 70-80% of all businesses are never sold, and 78% of exiting owners report dissatisfaction with their exit within 12 months of the close, we examined how entrepreneurs can improve their odds of exiting successfully while still holding on to the characteristics that have helped their businesses thrive.

And as a PhD candidate in Business Psychology at the Chicago School of Professional Psychology, Ms. Harding also mentioned the importance of taking time away from ownership duties for planning:

The most important thing [entrepreneurs and business owners] can do for themselves, and their business, is step off the treadmill for just a little bit…and take the time to really think about exit and to design a personal exit plan.

Ultimately, it’s important to begin building your exit strategy as early as possible, with most advisors saying that a minimum of 3-5 years of planning is ideal. Hopefully you’ve become inspired to get more educated on the topic by contacting an advisor who is an authority on exit planning, so you can know your business is in good hands after you leave. But more importantly, that you and your family can be rewarded for your years of sacrifice and effort, and you can move on to your next personal or professional adventure.

Posted by: Jeffrey Kadlic A co-founder and managing partner at Evolution, Jeffrey has spent the past 15 years as an investor and private equity professional with a true passion for working with dynamic small businesses. @kadlic

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