I read an interesting statistic the other day, although I did find it somewhat disturbing. According to the Exit Planning Institute’s Readiness Survey (2013), 75% of business owners “profoundly regretted” selling their business 12 months after the deal. To me, this is very sad to hear. I’m privileged to work with a select group of entrepreneurs and I know how much passion and energy they bring to their businesses. They pour their lives into these enterprises.
They look forward to the day when all of their hard work will culminate in a transfer of equity to someone else. But all too often, that moment is followed by disappointment. Why?
In my experience, there are three major reasons that business owners are not happy after they sell their company. First, they don’t have a life-after-business plan. Second, they didn’t maximize the value of the business. Third, they didn’t prepare themselves nearly well enough from a personal financial stand point.
If you are a business owner who is thinking about one day transferring your equity, or if you care about someone in this situation, here is my best advice about how to achieve the best possible outcome for this important goal.
Get ready for life after business
There is a saying that has guided me for many years and helped to keep me grounded. “We are not in life to have more business – but in business to have more life.” Entrepreneurs would do well to remember this. Sooner or later, the clock ticks down for all of us. Most business owners who love to work have to be ready to transition to a new love – or they feel terribly lost.
Let me give you an example. Here is a day in the life of a business owner who loves what they do. The alarm clock goes off at 6:00 AM. During coffee and breakfast, they are already thinking about their busy day, the meetings they will go to, the people they’ll talk to and the decisions that they need to make. Before they leave the house for the office, they’ve already checked email 2-3 times.
On their way to work, they’re probably making a phone call or preparing mentally for their first meeting. Then the day goes by like a blur. Meeting. Clock-check. Meeting. Clock-check. Before they know it, it’s 6:00 PM and they are rushing home to whatever social events the evening entails. Over dinner, they talk to their spouse – who in truth is probably tired of hearing these stories – about choices they made that day and what they think lies ahead.
Before bedtime, they are on their laptops or tablets one last time. Final emails will be sent. One last article will be read. The glow of their laptop or tablet lights up their faces until their eyelids begin to droop. Yawn. Laptop closes. Dreams ensue about the future, the amazing future that they will build in a company they love.
Here is a day in the life of that same person after they sell their business. The alarm clock does not go off because they did not set it because they promised themselves that they would sleep in now that they don’t have to get to work at a certain hour. But they wake up anyhow. Based on shear habit, their feet hit the floor and they start thinking about what they’ll do that day.
But instead of something to look forward to, instead of a meeting and important decisions and the risks and rewards of a chess-match that has driven their lives for the past 20+ years, there is nothing. No meetings. No pressures. No purpose.
I’ll say it this way. Sigmund Freud stated that all human beings need “leiben und arbeiten” – love and work. For entrepreneurs, love and work are often so co-mingled that they cannot separate them.
This is why you must make a plan for what you will do with your life after you sell your business… before you sell your business. You must begin to entertain certain other goals that will bring your life meaning and purpose before they become necessary. Because they may one day be your primary purpose, your reason to get out of bed.
Please do not make the mistake of believing that life after work will be primarily about golf, travel and hobbies. A number of entrepreneurs I know have thought this and here is their experience. After a few months of relaxation and maybe even perfection of their golf swing, they are bored. Travel is fun, but they miss home. They miss the thrill of the hunt. They miss the pressure and the sense of purpose that work brings.
So I’d like to make a recommendation here. Sit down with your spouse or someone else who knows you very well and begin to make a list of things you’ll do after you sell your company. For instance, when Bill Gates retired, he established the Bill and Melinda Gates foundation to solve some of the world’s greatest problems.
That may not be for you. Maybe you’ll start a new business. Maybe you’ll discover a new cause or passion that is something you’ve thought about for a long time. Maybe you’ll turn a long-time hobby into an actual enterprise. Maybe you’ll make a plan to re-connect with, a conscious effort to spend quality time with, family and friends who didn’t get to see you enough because of your hectic work schedule.
Whatever it is, you need to have a plan.
Maximize the value of your business
Going into the equity transfer process, most entrepreneurs have unrealistic expectations about the value of their company. Here is an important point to consider. Selling your business is a process that happens over time. This is more of a transition than it is a transaction. So I have some recommendations for you.
You should be taking steps now to de-risk and enhance the value of your business. I’ve written other articles about this topic so I won’t repeat myself here. Click this link to see a list of other articles.
A good transition plan typically starts at least 5 years before the actual transaction takes place. This also usually requires a team of experts in their individual disciplines, in addition to your CFO. In addition to maximizing business transfer value, a five-year plan also allows you to prepare emotionally and vocationally for the next phase of your life.
Most business fall into one of two categories: lifestyle or growth. Most lifestyle businesses have inherent risks that make transitions very challenging. The business owner sees the company as a means of personal income.
But often these companies are too dependent on the business owner to be financially viable independent of the owner. For lifestyle business owners to achieve the kind of financial results they want, they typically have to adopt the mind-set of the growth oriented business.
Growth oriented businesses are built around systems and processes that run independent of any given individual. These businesses are measured by functional area with approaches like a balanced score card, where empirical evidence, not hunches and feelings, deliver proof of the value of the function.
Of the two business models, growth oriented businesses typically produce many times more net income during a transition than do lifestyle businesses. So my advice to you is this.
If you run a lifestyle business today, adopt a growth oriented mindset now, with systems and processes that run effectively independent of you. This will allow you to realize the maximum value for your company in a liquidity event.
Prepare yourself financially
Most successful business owners adopt a certain lifestyle – a lifestyle associated with financial success. But most business owners don’t know how much that lifestyle will cost over the period of retirement. The lifestyle costs could be many times more than the cash generated from the liquidity event.
This is why you need a financial plan now and a plan that accounts for the amount of cash you’ll need throughout retirement. You don’t want to be surprised by the retirement lifestyle number.
A worst case scenario is that you burn through your cash reserves in the first few years of retirement and have to spend the rest of your golden years living a much reduced lifestyle. This is why you need analyses and projections now that account for reasonable rates of return on your investments and the cash-flows you’ll need for the future.
Business owners are great at growing businesses. But typically, they are not great at saving money and managing it when it becomes scarce. Most business owners seem to buy into the notion that to make money you have to spend money. This is a hard habit to break in retirement when making money is no longer a consideration.
This is why you need to have a retirement plan that accounts for the habits and mindset of an entrepreneur. Most entrepreneurs have the business building itch. This itch only gets stronger when they have more time on their hands – something that comes with retirement.
So as you are thinking about the cash-flow needs you’ll experience in retirement, it is wise to think about, and have a plan for, investing in other businesses or new ventures. Your personal financial plan should account for this.
It is advisable to separate wealth set aside for basic lifestyle expenses from wealth set aside for new ventures. In my experience, wealth set aside for lifestyle expenses should balance needs for growth with protection of capital. Wealth set aside for new business ventures should be something where you are prepared to put capital at significant risk, and hopefully reap great new rewards.
Should we talk?
If you are thinking about selling your business in the next 7 years or so, it is wise to begin your planning sooner rather than later. A formal five-year plan actually requires some time to setup before the plan goes into effect. Some plans may require more than five years for the owner to achieve their liquidity goals, depending on their current lifestyle and wealth already accumulated.
My point is simply this. Don’t wait too long or you may find yourself in the unfortunate position of the 75% of business owners who regret their decision. I don’t want to see that happen to you. If I can be of assistance, please reach out to me for a conversation.
The information contained in this article is provided for informational purposes only. No illustration or content in it should be construed as a substitute for informed professional tax, legal, and/or financial advice.