Mind The Gap

Business owners work really hard. For most, you start with nothing and create something. And whether that something is really big or not so big, it’s yours. You designed, built it and breathed life into it and that alone makes you a special breed. Often times though, business owners get so wrapped up and focused on making their business the best that it can be they don’t have time to focus on the exit. The reality is though that for most business owners, once you’ve taken off, the exit becomes critically important.

Many studies have estimated that the average business owner has about 80% or more of their net worth wrapped up in their business. Similarly, almost all business owners are counting on the proceeds and equity in their business to at least partially if not fully fund their retirement years. So, it’s easy to see that how you exit your business is mission critical to how you spend whatever comes next for you and your family. While we all love to dream about leaving our businesses on our terms, when we’re ready and selling to a strategic buyer who will offer us top-dollar for what we’ve built, the truth is that those circumstances rarely happen exactly like we plan.

Far too often business owners find themselves in a situation where they have to leave or sell the business sooner than they’d like. A partnership dissolves, an illness occurs or any number of other unforeseen circumstances send our perfect plans spiraling into a contingency plan. When this happens, there is typically a gap (and often a sizable one) between what an owner needs monetarily for their next phase of life vs. what a buyer is willing to offer. When this happens, there are really only a couple of options….either sell the business for less than what you could have under ideal circumstances or maybe (assuming it’s even possible) agree to some sort of earn-out period where you lose control of the company but continue to work for the new owners while getting paid over a long period of time.

While it’s far too common for business owners to find themselves in this gap scenario, the good news is that with proper planning and diligence it is avoidable. Business owners who start early and keep focused eye on their exit strategy and what they hope to achieve when they exit can plan accordingly. By focusing on things inside the business that reduce risk to future cashflow (this is what the acquirer cares about) you can and you will fundamentally increase the value and attractiveness of your business. Less risk means more cash and more cash means bypassing the dreaded retirement gap and leapfrogging with a smile into whatever you dream up next.