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Advising Clients on Exit Planning: Part 1

An introductory four-part guide for helping clients increase the value and net profit of their businesses.

As a wealth advisor you likely understand that every business has a life cycle. For most privately held businesses, that cycle is tied to the life of the owner. At some point for one reason or another, every business owner must face the fact that their business, as they know it, will cease to exist.  

Begin With the End in Mind 

The life cycle of most privately held companies generally does not end with a sale to a third party or an intergenerational transfer. Approximately half of all “successful” businesses are derailed because of the death, disability, or divorce of their owner(s). Given the infrequency of successfully exiting or selling one’s business it is not surprising to learn that before the COVID-19 pandemic, approximately 80% of business owners who decided to sell their businesses were unsuccessful in doing so. Of the remaining 20% who exited, nearly three-quarters “deeply-regretted” their decision to sell. This leaves approximately 95% of business owners either unsuccessful at selling or dissatisfied for having done so

Most business builders are faced with a challenge. And while the bottom line begins and ends with the business owner, I believe that the failure for a successful business transition often lays rests with the wealth advisory community. 

Read the Full Series: Part 1 Part 2 | Part 3 | Part 4

The most serious challenge for seasoned wealth advisors is to effectively advise their clients on how to best prepare to successfully transition or sell their business. 

The number and complexity of decisions that are made from the onset of an intention to sell one’s business to achieving life post-sale, are daunting. Nearly every aspect of an entrepreneur’s life can be impacted by transitioning, and choices made long before a buyer is identified can have repercussions that extend to future generations. 

What makes a difference, perhaps all the difference for a successful transition, is a comprehensive strategy that encompasses all the facets of successfully shifting from the role of owner/CEO, to whatever follows. As the adage goes, “just because a business owner is ready to retire doesn’t mean the owner is prepared to retire.”  

Unfortunately, according to several surveys of business owners conducted by the Exit Planning Institute, almost 50% of business owners have done no planning at all for their transition. Furthermore, over 79% have no written transition plan or strategy for the next step in their life. Most simply have not thought through what they want to do personally, after leaving the business. 

Many advisors have discovered that while there is a dominant pattern that is commonplace in their clients who desire to exit, each case is unique. Techniques and methodologies applied to the foundational components of transitioning vary widely.  

The best of these integrates the planning facets through a transparent process capitalizing on value creation. A properly developed and staged exit plan critically examines a variety of areas, including the business’ leadership team, business structure, social capital, existing client base, pre-sale tax planning and comprehensive risk analysis.  

To do this effectively often requires a multidisciplinary team of professionals who collectively hold a deep acumen in each requisite area of planning. 

  • Do you have an exit planning team? If not, why? 
  • Who leads the team? Why? And
  • Is a client’s current team capable of taking a client’s business to the next level of success? If not, what are you going to do about it? 

The past decade has led to an advancement in both the art and science of exit planning. Advisory firms at the forefront of this space who, in the past focused exclusively on identifying post-sale assets for management, now adopt a formalized approach that often begins years before a business is ever sold. These firms reach far beyond the numbers to achieve a notably higher level of post-exit satisfaction for their clients. In doing so, they often become the clients’ most valued advisor. 

Even so, the challenge to meet the high demand for expertise is akin to using a shot glass to empty an Olympic pool. It can be done over time, but time is not a friend for the tens of thousands of successful business owners who plan on transitioning over the next few years. 

Making matters worse, today’s business builders face new and potentially more disruptive forces that extend beyond the COVID-19 pandemic as they stare down the barrel of climbing interest rates and inflation. These types of disruptive forces push family businesses to adapt resources that extend far beyond relying on their reputation and leadership. Entrepreneurs who want to sell their business are required to undertake a more comprehensive approach if they hope to achieve their ambitions. Thoughtful governance, a viable leadership team, modern digital capabilities and enumerated and prioritized goals, are now foundational to taking the next step in the life and sale of a family-owned business. 

Even before the pandemic, family businesses were facing strong headwinds as they positioned to sell. In a 2019 PricewaterhouseCoopers (“PwC”) survey, barely half of the business owners responded that they were predicting growth in 2020. This was the lowest percentage since 2010, which notably, was the tail end of the Great Recession. In 2020 PwC conducted another survey highlighting those businesses that had successfully developed profits in 2019. Not surprisingly, COVID’s impact cut the number of profitable family businesses by half, to only 28% of the respondents. Today, contending with increasing interest rates and possible stagflation, even the most profitable businesses and professional firms face an uncertain future.  

All of which begs the question, “how should advisors best prepare their clients to transition to the next stage of ownership?” The answer generates a multitude of new questions, challenging business owners and their advisers to undergo honest introspection and a willingness to expand their own capabilities and circles of influence. 

Critically, the greatest financial reward should come from business value, not business income. Many business builders make a very comfortable living having “lifestyle” businesses. A lifestyle business can generate millions of dollars of an annual income for its owner. There’s nothing wrong with a lifestyle business, but a business that can be sold for a significantly higher multiple can generate far more wealth than one focused exclusively on the income of its founder. At the same time, building value in a business can significantly increase client’s income and profitability. When done properly, the two go together hand-in-hand, supporting the saying that “good exit planning is good business planning.”  

What if you don’t want to sell a client’s business? Being ready to sell without wanting to sell can be extraordinarily valuable. Doing so can energize a client’s leadership team and a client’s company overall to reach best-in-class performance standards. It affords clients with a proper contingency plan, increases a client’s company’s income, profitability and value. It is also not uncommon for unsolicited offers to take place, particularly for those businesses that are best poised to react to them. Why not be open and prepared for all the opportunities that come a client’s way?  

As one might imagine, advisors will often differ in the style, tools and techniques employed to help their clients define and attain a successful business transition.  

Uniformly, every advisor with whom I work agrees that successful exit planning or transitioning is far more than just numbers. 

Much of the advice historically provided to business owners has emerged from a broken model where clients were simply a commodity for their wealth advisors. I have witnessed countless advisors from the largest and most prestigious investment management firms redefine themselves as “private wealth managers” without any advanced training, essentially undertaking the role of an expert without having the expertise to do so. 

This approach is perhaps the very nature of why business owners often find themselves experiencing a 95% level of dissatisfaction in selling their businesses. How then, to transcend this unacceptable terrain? 

This series of articles is an introductory guide to help you begin thinking about exit planning for your clients. It was written to help you recognize that by taking the initiative to add value to a client’s company, you can help them increase profits, lifestyle and their level of happiness almost immediately. It focuses on the key stages of transition planning, examining the issues and solutions developed and practiced by myself and a group of trusted colleagues who are advisors at the forefront of helping clients sell or transition. It is designed to help you begin to think about what you should consider to help clients maximize the future sales value of their enterprise, and how you can help to increase the net profits that a client’s business retains each year. 

Brad Barros is the Co-Founder and a Director of Private Risk Capital Development Advisor, LLC, and Private Risk Partners, LLC.

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