This is the first in a series of two related articles about exiting your business and succession planning.
The second article will appear here on February 15.
Exiting Your Business: It’s a Mindset, Not a Transaction
Clarity on Success and Exit Options Yield Choice and Optimal Results
By Tim Young
We plan, God laughs. It’s a rough translation of an old proverb that speaks to the unpredictability of life.
Proverbs like this one endure because they’re succinct and, much like the best comedy, they have a strong basis in truth. They leave us with a wry smile and our heads nodding gently in agreement. This one rings especially true because experience has taught us that predicting the future has very long odds.
But all too often—and counter-intuitively—this is the approach that many successful entrepreneurs take when they think about exiting their businesses. Rather than thinking analytically and in terms of outcomes as they do in business, they often “plan” on a sale using a suspect back-of-the-envelope multiple to a nebulous buyer.
It doesn’t have to—and shouldn’t—be that way. There is an alternative. Getting there requires a critical shift in mindset; thinking differently about the future and how to get there.
Rather than setting sights on an ambiguous sale transaction sometime in a hazy, distant future, this mindset focuses on getting clarity around a vision of success—what you want to do, how you want to do it and where you want to go—what the options are and identifying the best path to get there at the time of your choosing.
It’s About Clarity
Most owners don’t have enough clarity to understand their options—what’s possible and what’s not.
Among the most fundamental issues is understanding the true value of their business and determining if that value meets the need for financial security after cash flow from the business is gone post-exit. As humans, we tend to be wowed by numbers that seem large, but often willfully blind unless they’re applied practically.
Until an entrepreneur has a process that helps them have a complete understanding of potential options and what they’re committing to, it’s hard to get to a mindset where they can think about the best path, e.g., next-generation transfer, inside sale, 100% or minority ESOP or a third-party sale.
Achieving clarity involves a second important shift—it’s not just about you. Entrepreneurs must acknowledge and understand that their decisions on the operating business also affect other peoples’ lives—leadership/board members, management, employees, investors, customers, vendors/ suppliers, the industry, family and their communities.
A successful business is rarely, if ever, the work of a sole entrepreneur. The people who helped build the business are as integral to its success as its founder.
It’s About Alignment
Clarity, however, isn’t always easy to achieve when the pressures of the business—compounded by the unpredictability of life—dominate the here and now. The urgent overrules the merely important.
It is indeed hard to focus on a vision and future outcomes when you’re worried about production and sales, you’re down two customer service reps and new proposed state regulations threaten a third of your revenue. These are real issues and the future, much less any clarity about future options, often get kicked down the road. But future clarity comes from the decisions that are made today by aligning the numerical, operational and relational aspects of the business in such a way that future options and a path become clear.
Numerical
Numerical alignment comes from in-depth analysis of the financial aspects of the business. It comes from stress-testing the analysis under best- and worst-case scenarios to identify where the strategy works and where it doesn’t.
Operational
Operational alignment examines the strength and viability of the business structure. This is where issues of leadership and management succession enter the picture, as well as business practices. Is there a formal succession plan not just for ownership but also for key leadership positions? What are the qualities required of business leaders? How are best practices being used to correct known business challenges and identify unknown issues?
Relational
Not least important is identifying the stakeholders that will be affected by the numerical and operational decisions. How can they be affected? What are any unintended consequences?
When there is alignment not just within but between each of these fundamental aspects of the entrepreneur’s world—and there is a clear understanding of best- and worst-case scenarios—the result tends to lift a huge weight from an entrepreneur’s shoulders. The resulting freedom that comes from looking at the future differently tends to create intense focus because the vision has become clear.
It Isn’t Just a Business Decision
As businesspeople, we’ve been inured to think unemotionally—“It’s not personal, it’s business.”
But exit and successions simply aren’t unemotional “business as usual” decisions. In fact, the process requires emotion. It’s about ensuring that the entrepreneur is emotionally anchored and invested in the outcome; that the impact of what they are choosing to do makes sense on all fronts and with all stakeholders.
Rather than God chuckling at our plans that have little basis in reality, we can smile confidently knowing what our options are and what’s needed to achieve them.
