12 Reasons Owner Transitions Fail (And What to Do About It)
Over the past several years, we have spoken with business owners around the country who had decided they had reached the point of being ready to leave their businesses. However, no one was stepping up to provide them the exit results they wanted. These owners had spent all of their time aggressively working in their business, but had spent little time aggressively working on how they would eventually exit their business. They found themselves late in the game with few options to achieve their exit objectives. Simply put, they were too late.
The failure of a business owner to properly plan for his or her transition and exit is often cited as the reason for such failures.
What follows are 12 of the principal reasons we've seen where business owners have failed to plan, which has caused their transitions and exits to be unsuccessful. Each of these reasons impacts the company's ongoing profitability as well as an owner's future exit results.
- Unclear and Conflicting Owner Objectives. Your financial, personal, transition and exit objectives are not determined or conflict with each other (or with the objectives of your partners, key employees, spouse or other family members).
- Cash Flow Impact On Company Price Misunderstood. You haven't understood your exit is dependent upon an inside buyer's or third-party buyer's expectations and needs regarding your company future cash flow and you haven't uncovered or understood how your company's exit-appropriate buyer-specific valuation is to be determined.
- No Business Owner Estate Plan. You have not realized the difference between a regular and business owner Estate Plan and you have failed to adequately protect your family and address your family's needs and desires relative to your business.
- Insufficient Company Structure and Key Asset Protection. Your company is not properly structured to protect assets, and you have failed to identify your key intangible assets or to adopt the legal safeguards to protect your key intangible assets (such as your key employees and intellectual property rights).
- Co-Owner Issues and Disputes. You have failed to utilize a Buy-sell Agreement and a Business Continuity Agreement to pre-decide how ownership will be bought and sold (and funded) between partners upon death, disability, divorce, disputes, and retirement and how to avoid or resolve co-owner disputes due to future disagreements.
- Mismanagement of Personal Wealth. You have failed to properly manage your personal (non-company) wealth, resulting in an indefinite and extended need to draw on company resources and a disruption to your transition timing and to your successor's expectations.
- Nonsustainable Business Growth. Your company lacks an effective transition period Strategic Growth Plan and Continuous Business Model Improvement Program for sustaining continued product and service innovation, brand recognition, business growth and profitability, all of which impacts your company's growth and survival, and therefore your future exit pricing and feasibility.
- Lack of Capable Leadership Management Successors. A process for replacing key management or leadership (either internally or externally) has not been identified or developed, and you have failed to properly develop, incent and retain key personnel.
- Not Keeping the Business Always Ready for Sale. You fail to realize your company should always be ready to be sold. The future can quickly change your presently expected business exit timing.
- Missing Pre-Exit Tax Tools. Pre-Exit tax minimization steps haven't been taken in time.
- No Capable Inside Buyer Exists. You haven't groomed a capable inside buyer (such as a partner or key employee) to be ready to buy when you're ready to sell, and you haven't designed an economically and financially feasible, mutually beneficial, tax efficient sale structure to an inside buyer.
- Misunderstanding M & A Market. You are unable to sell to a third party due to not understanding, addressing, and managing toward the expectations of the mergers and acquisition market for your company in your industry.
In the context of successful business owners exits, the type of planning which is needed is Transition Growth Planning (which encompasses Succession Planning, Transition Planning and Exit Planning).
The purpose of Transition Growth Planning is to lay out a systematic approach which helps assure that you timely and thoroughly take the steps needed to achieve success in accomplishing your personal, financial, transition and exit objectives.
The Transition Growth Planning process provides a means for business owners to help see the status of their own transition and exit situation and will show you the steps needed to actively do something about it. This is not a plan to read and then put on the shelf. It's a plan that is intended to help business owners address the call-to-action every business owner needs to undertake.
A Transition Growth Plan will address the above 12 problem areas and will help you avoid these pitfalls and mistakes. This plan provides you with a tailored roadmap for how you will achieve your transition and exit successfully, on your terms and on your timetable.
About the Authors
Nicholas K. Niemann, ESQ and Andrew D. Horowitz, CPhD are the founders of East West Publishing LLC and the Co Authors of "The Next Step for Business Owners" book.
The Next Step for Business Ownersbook provides a roadmap which will help you successfully chart a course for your eventual exit from your business. While it presents a proactive plan for your exit, it also addresses contingencies for early death, disability, departure, divorce or burnout. The objective is to maximize your net value, minimize taxes, maintain your control of the process and help assure personal, financial and legacy objectives are met.
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