Practice Management

A Graceful Exit?

Business owners are at a loss when it comes to exiting the business

by Andrew A O’Brien, JD, CFP, CLU

Mr. O’Brien is Director, Client Solutions Group, Securian Financial Services, Inc. Connect with him by e-mail: Andrew.obrien@securian.com

Business owners put their blood, sweat, tears and resources into building their businesses. But when it comes to figuring how to make a graceful exit from the business, most are unprepared.

That’s a key finding of a Securian-sponsored nationwide study of small business owners. The online survey focused on successful private businesses, averaging 13 employees and 18 years in business, in a variety of enterprises.

 

The study found:

  • Many business owners don’t have a strategy for exiting the business. Many aren’t even working on one
  • Owners may not think about leaving because they concentrate, among other things, on growing the business today
  • The lack of a capable successor with the financial ability to run the business is an obstacle to leaving the business

Are exit strategies necessary?

The widespread absence of exit strategies prompts a question: Do they matter? For most owners, the business represents a significant, and likely their largest, asset. By not managing for the future of that asset, the owner risks leaving its fate to chance.

Some business owners find that health issues or changes in the business or the economy lead to sooner-than-anticipated retirements. A 2013 survey found that 47 percent of workers retired sooner than anticipated. Reasons included health problems or disability (55 percent), having to care for a spouse or family member (23 percent), or changes at their company (20 percent).

There’s also the risk of exposing the future of the business to the unexpected events that no one wants to think about: death or disability. Failing to develop an exit strategy, however, can leave the business, the business owner’s family, the partners and employees in a very difficult situation.

A majority will leave within a decade

The exit is not that far down the road for most business owners. One-third expect to leave the business within five years, and 60 percent anticipate being gone within 10 years. But key findings show:

  • More than 60 percent of business owners don’t have exit strategies and aren’t working on one
  • Sixteen percent are working on strategies, but haven’t completed them. Only 24 percent have formal exit strategies in place

Focused on growth

The exit is not that far down the road for most business owners. One-third expect to leave the business within five years, and 60 percent anticipate being gone within 10 years

Business owners don’t have the time to develop strategies because they are focused on helping the business succeed now.

Reasons for not preparing strategies include:

  • A focus on growing the business – 30 percent
  • The business owner is indispensable – 30 percent
  • Lack of qualified candidates – 18 percent
  • Prospective successor can’t afford to buy the business – 15 percent
  • No time – 15 percent
  • Family not interested in taking over the business – 15 percent

Finding a buyer poses a major challenge

  • The biggest obstacles to exiting the business include:
  • Finding an appropriate buyer
  • Choosing a successor
  • Figuring out when to retire from or exit the business
  • Determining the worth of business

Selling the business is the most likely exit strategy

  • 33 percent of owners intend to sell to a third party.
  • 25 percent expect to close or wind down the business; This approach is more likely for businesses with one or two owners
  • 20 percent expect to transfer it to a family member.
  • 20 percent anticipate selling to a partner or key employee

Help wanted

Business owners looking for help preparing exit strategies say legal and financial resources are most important. More owners are looking to a team of experts for help. Financial advisors who understand business succession strategies can be useful to business owners who are ready to address this important challenge. ♦

Methodology
Respondents were recruited to participate in the study through Survey Sampling International’s business web panel
500 surveys were completed
The web surveys took place in July and August 2013

These are the opinions of the author alone and do not necessarily reflect the views of Minnesota Life Insurance Company or Securian Financial Group, Inc. End Note 1. Source: 2013 EBRI Retirement Confidence Survey Accompanying graphic: Caption: Help wanted. Business owners looking for help with exiting their businesses say legal and financial resources are most important. More owners look to a team of experts for help. DOFU 2-2015 A00573-0215