Do you run an immortal business? I hope so. If you answered “no,” or even hesitated to be sure of your response, then you don’t think of your business as immortal.
So when do you plan to shut it down?
Most owners react viscerally to that question. They’ve invested too much time and too much sweat to watch their companies become a memory. They care too much about employees and customers to entertain the idea of abandoning them.
For many, the business is a part of them. Shutting it down would be like having a piece of you die.
Ironically, we play mental gymnastics in our heads every day. We think we have an immortal business. We know we aren’t immortal (on this plane of existence, at least.) Yet, I talk to owners every day who want to pretend that either they will run the business forever, or that it will find some magic way to continue without them.
Anyone who works in exit planning knows the standard answers to the question “What is your exit plan?”
- “I intend to look for a buyer in about 5 years.”
- “I still enjoy my business. Talk to me after I get tired of it.”
- “I’ll sell anything for the right price if someone offers it.”
Each of those answers is a version of “I haven’t thought much about it, and I really don’t want to.” I wouldn’t be much of a consultant (or at least I’d be an impoverished one), if I didn’t have some counter arguments ready.
- “I intend to look for a buyer in about 5 years.” That’s fine, but five years is about the minimum time you should allow for any serious tax planning. If you are going to take a subchapter S election, create a new entity, or change your depreciation methods, it will take some time to have the desired effect. Of course, the Internal Revenue Service already has a plan for how they would handle the proceeds, so you could just go with theirs.
- “I still enjoy my business. Talk to me after I get tired of it.” That is clearly too late. Whether you are selling to employees or family, or marketing the company to third parties, the business needs to be running well to survive a transition to new ownership. Once you start losing interest, it gets much tougher.
- “I’ll sell anything for the right price if someone offers it.” Sure but what is the “right” price? Is it based on industry metrics? Is it some multiple that a guy from a vendor told you a competitor sold for? Is it a number you need for retirement that has little to do with market value? If you received an offer tomorrow, how would you know if it was the best offer you might ever see?
The most important thing to remember is this: Planning is only planning. Implementation is a different activity in the management cycle. Just because you have a plan doesn’t mean you will use it today or tomorrow, but it will still be there when you choose to put it into action.
If you own an immortal business, you have an obligation to the folks who depend on it. Part of that is to know how they will be able to continue depending on it when you aren’t there.
If you know a business owner who would benefit from “Awake at 2 o’clock,” please share!
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Is there a supervisor or project manager who seems to spend most of his time waiting for the next job? A technician who is snapped up by another team the moment he becomes available? A support person who always has a disproportionate backlog of help requests? An engineer who spends most of his time working on tasks that are below his pay grade?
The M&A world abounds with horror stories of financial buyers who stripped the employee benefits from a company and drove off its key personnel. Others pulled their capital as soon as they had control (to leverage it in another deal) and left the business staggering under the debt replacing it. Still more inserted a Hired Gun executive from another industry whose inexperience quickly ran the business on the rocks.
Of course, employees have the right to their lives. We are all distracted by problems involving home, health and family. Some people, however, just seem to make a lot of bad decisions despite the best support you can render.
Selling to employees requires legal agreements, specialized compensation plans and a willingness to run the company transparently. The return is a team that is committed to the long term, highly motivated, and all on the same page when it comes to growing the business.
In my head the answer to the question was an immediate “No”, because no business is immortal. That, however, is a completely separate question from, “Do you want your business to continue after you are gone or out of it”? Taking action to perpetuate a business may or may not succeed, but all entrepreneurs are used to that risk.
There is no question that in most cases long term planning greatly increases the chance that a business will continue after the owner is gone. Then again, do not be afraid to jump if dump opportunistic luck comes along and someone offers a big chunk of money.
I concur with your post. I’ve been involved in corporate practice, and the M&A field, for over 4 decades. One thing that is readily observable is that few businesses last forever. The vast majority have a finite life. Competition, evolving business models and disruptive technologies tend to take a toll. Want to own a retail store today? The primary focus of a business owner should be on how to preserve accumulated wealth for future generations. That could mean planning to keep the business in the family, at least for the next generation. But often the wiser choice is to realize your investment when the business’ future looks the brightest and capitalize on what you’ve built. In other words, sell when the business asset when its at its highest value, rather than at your scheduled retirement date. A lot can happen between now and then.