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The Importance of Exit Planning for Entrepreneurs

Tuesday, 5/04/2016 @ 1:52 pm

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. Entrepreneurs are well-known for being focused in the way they operate professionally, looking more towards future growth and successes of their business, rather 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 strategic and planned decisions regarding their ultimate exit from the business.

The Implications of Not Having an Exit Plan

If an exit plan is overlooked 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 podcast, 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.

Another great resource on this topic is Bo Burlingham’s Finish Big: How Great Entrepreneurs Exit Their Companies on Top.  In his book, Bo describes the four phases of an exit, including Exploratory, Strategic, Execution and Transition.  As an introduction to these phases, Bo describes them in detail on an episode of The Second Stage.

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 necessary. Hopefully you’ve become inspired to get more educated on the what is potentially the most stressful, yet most rewarding process a business owner can go through – and most times only once in a lifetime. Importantly, you and your family should be rewarded for your years of sacrifice and effort, with the freedom to happily move on to your next personal or professional adventure.

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