Are you mentally and financially ready to exit your business?
Whether it arrives after a few years of intense work or decades of dedication, there comes a time when every business owner must consider an exit strategy. While much goes into crafting a specific plan, the feasibility of an exit is largely based on two foundational aspects: mental and financial readiness.
While financial readiness is certainly important, mental readiness must be discussed first. That’s because a lack of mental preparation for the future can be unhealthy and dangerous on multiple fronts. However, if the proper groundwork is laid, you can rest easy at night.
Mental readiness simply accounts for your future after selling your business. Whether you realize it or not, your exit will have an effect on a number of different areas of your life. This includes how your exit will affect your desire for control, emotional stability, family relations, and future plans.
Determining your level of mental readiness is not an exact science. However, there are plenty of tools to help you along the way. Let’s take a look at three questions you need answers to:
Are you ready to relinquish control?
It can sound like an easy question, but it’s loaded with individual considerations. Depending on your personality type, an exit may be more difficult than anticipated. Signs you are ready to relinquish control include presently delegating the majority of your responsibilities, becoming increasingly trustful of your employees, feeling less equipped to handle tasks, and losing interest in things you once found fulfilling.
How will your exit affect your family?
This is a complicated question and is arguably the most important area of mental readiness. The best way to determine how it will affect family members is to have frank discussions with everyone involved. If you have a spouse, are you both on the same page? If you have family members working in the business, do they understand how the change will affect them? Finding answers to these questions—and many more—will better prepare you to exit.
Do you have a plan for life after your exit?
Many people wrongly assume their life will just fall into place after an exit. However, you will likely need to develop some sort of plan for your future. What will you do with your free time? Filling your free time may mean picking up hobbies, pursuing another business opportunity, or spending more time with family—just make sure there is something waiting for you.
How does financial readiness play a role?
Where mental readiness is rarely considered, financial readiness is usually the focus. Despite this, many individuals exiting a business don’t approach it in the correct manner. Instead of weighing all the factors and thinking about the true costs and benefits, they simply look at a single financial figure or statement.
Unfortunately, financial readiness depends on more than just a dollar sign. You must determine how your exit will financially affect the business, your wallet, and your family’s financial future and security. Questions you will need to consider include whether you understand the financial cost of selling your business. If you don’t have any experience selling a business, you may not understand all the costs that go into such an important transaction. The sale will incur commissions, taxes, transfer fees, and more.
Make sure you calculate these into your valuations.
Will you be financially secure for the remainder of your life? If your exit is paving the way for retirement, it’s important to determine whether you will be financially stable. Consider the increasing cost of health care, the status of your portfolio, and how much you need to live comfortably.
Will you be able to support people you care for? Whether you are a parent or grandparent or have someone else who depends on you, you need to consider how your exit will affect the financial stability of dependents. Do you have goals of paying for college tuition? Do you need to cover assisted living expenses for a parent?
According to a BERI report from Pinnacle, people aren’t as ready for their exit as they think. While the majority of individuals considering an exit have their finances under control, it’s the mental side of the equation that needs help.
However, the opposite is also true. When business owners have plans in place, are becoming increasingly discontent and less enthusiastic, and have properly prepared the company for transition, an exit may be viable.
Leonard J. Miller, CPA, BMA, CVA, PFS, is the president and founder of Leonard J. Miller & Associates, Chartered