How Emotions Can Affect An Exit
A hypothetical outlining the dangers of entering negotiations without rationality
Generally, business owners feel comfortable in that role. They enjoy what they do, but rationally, know they will need to move on in their businesses eventually. Unfortunately, most owners don’t resist planning their exits on a rational basis; instead, they resist exit planning at an emotional level.
Consider this hypothetical: Clancy, a 50-year-old business owner. He loves working at and owning his 25-person manufacturing company, but he knows that he’ll eventually need to prepare for retirement. He assumes if he can sell his business for about $5 million, he and his wife can live comfortably and still help send their grandson to a fine colleges. He has his business professionally appraised and learns it’s worth $3.5 million.
He talks to his friend – a fellow business owner – about his exit. His friend refers him to an exit planning advisor, who lays out several strategies, including urging him to train a management team to assure that his business has transferable value. Clancy agrees, but doesn’t act. After leaving his exit planner’s office, he begins working on a proposal for what could be the company’s largest contract ever
Three months later, Clancy’s business wins the contract. This win rekindles his love for the business, and so he puts off exit planning for when he tires of working. Rationally, he knows he should address his retirement, but he’s riding the high of success. He stops taking his exit planner’s calls, figuring he would worry about his plan when he was ready.
Ten years later, Clancy decides he’s ready to exit. He considers calling his advisor but decides he doesn’t want to pay for the services and that he can do it alone. After all, he managed to close the biggest deal of his company’s history on his own.
Though he’s confident he can sell his business for at least $5 million, he has his business professionally appraised once more. He finds out that it’s worth $6.5 million, and decides to sell. After putting it on the market, he meets with a serious buyer.
During the meeting, the buyer’s representative asks Clancy, “Can you tell me about your management team?”
“You’re looking at it,” Clancy says, proudly.
“So, who takes over when you leave?” the representative asks.
Clancy pauses, then says, “I figured that was your responsibility.”
The representative asks a few more operational questions and tells Clancy she’ll be in touch with him. A week later, the buyer offers Clancy two options:
1. $3 million pre-tax if he leaves now
2. $5 million pre-tax if he stays on to help train a management team over five years.
Clancy is furious, and points to his professional valuation. The buyer’s representative tells him his valuation assumes he stays with the business. She also explains that since winning the big contract, cash flow has remained stagnant, meaning the buyer would have to invest to build cash flow.
Clancy declines the offer and approaches several other buyers, but those buyers heard that Clancy pulled out of a deal earlier. Coupled with the fact that he had no management team, each buyer offers even less than the original.
In desperation, Clancy calls his exit planning advisor and tells her what happened. She suggests he set a meeting.
There, Clancy’s exit planner explains how the process could help him create transferable value that would allow him to reach his personal financial goals and ensure that the business would continue to flourish without him. She explained that exit planning and value building would take years. Fortunately, during those years, Clancy could change his role and focus his efforts on areas of the business that would most benefit him and his company.
From fear to overconfidence, emotion plays a huge role in business owners’ exit planning decisions. Clancy lost millions of dollars and years of retirement because he had no one to act as a check on his emotions. Leaving the business is one of the most emotional events business owners can face, which means business owners should take care when making decisions that can affect their business exits.
If you’d like to discuss how to address both the emotional and rational aspects of your business exit, contact us today.
The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial advisor. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial advisor. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.
Article presented by Karen Jessey, ChFC®, CLU®, CFP®, RCIP®, CExP™, Karen.Jessey@MyStrategicWealth.com, a Member of BEI’s International Network of Exit Planning Professionals™. ©2018 BEI
Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS). OSJ: 6455 South Yosemite Street Suite 300, Greenwood Village, CO 80111, 303-770-9020. Securities products and advisory services offered through PAS, member FINRA, SIPC. Financial Representative of The Guardian Life Insurance Company of America® (Guardian), New York, NY. PAS is an indirect, wholly-owned subsidiary of Guardian. Strategic Wealth Partners is not an affiliate or subsidiary of PAS or Guardian. 2018-65628 Exp. 8/20 2) This material contains the current opinions of the author but not necessarily those of Guardian or its subsidiaries and such opinions are subject to change without notice.
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