owner, it’s best to begin planning your exit strategy sooner rather than later. When to Begin Many experts suggest that business own- ers begin planning their exit strategy al- most immediately aſter startup. This re- minds me of when financial planners tell younger people that they should save at least 15 percent of their income in a quali- fied retirement plan. Although sound ad- vice, the reality is that you’ll likely have your hands full just trying to launch and ensure business survival in the early stag- es. Yes, you should focus on growing your business, but don’t wait too long to begin thinking about your end game. Keep in mind that your circumstances will likely change over time. We can all expect to age (some gracefully and oth- ers, not so much), and one of the more common occurrences is deterioration of the business owner’s health. Life has been known to throw us sudden curveballs, and sometimes these can happen while we’re still relatively young. The point is that we may not always be in control and might be unexpectedly forced to sell or liquidate our businesses. The good news is that many of the steps for growing our business will also help to increase its perceived value, marketability and appeal to a potential buyer. Building a solid, successful business is con- sistent with the notion of enhancing options for our ultimate exit. A well-run, financial- ly sound business with appropriate infra- structure will tend to be more successful and appealing to virtually any suitor. Exploring Your Exit Options There’s nothing inherently wrong with planning a WUID exit plan. You know the one: “Work Until I Drop.” Indeed, for many “type A” personality entrepreneurs, this one is very common, primarily because WWW.ALOA.ORG their business is also their passion. “What would I do with myself if I was not running my business?” Sound familiar? But here’s the catch: None of us knows our “expiration date” (I’ve looked all over my body for one), so avoid the common trap that risks leaving your kids and/or spouse in a financial mess. Let’s be a bit more direct and ask: “What happens if you unexpectedly drop dead or become incapacitated?” So much for your bulletproof WUID exit strategy! Yes, you might be able to just cease operations and liquidate when the time comes, but let’s think about that for a moment! This approach requires navi- gating and coordinating the various tim- ing issues and related land mines. You’d probably have some vehicle, equipment or building leases. You’d likely then try to sell your inventory, equipment, supplies, tools and any other hard assets. But what’s that stuff really worth, espe- cially under such “fire sale” circumstanc- es, assuming you can even find a buyer? Having liquidated entire companies, I can surmise that you probably have more worthless crap (“one man’s trash is anoth- er man’s treasure”) than you are willing to admit and will likely be very disappointed in your sale proceeds. Think garage sales! One other familiar potential exit lane looks like this: “My plan is to sell the business to my kids.” This option is very common, but it begs the question of how and when (also if) you will actually get paid. Do you really believe that your kids will have the money to buy your business? Will they require a source of funding and, if so, will they (and the business) qualify for a loan? Can the business’s cash flow handle debt service for a loan? Will your kids even want to take over your busi- ness? You are the one who wanted them to get a good education so they would have attractive career choices! Remember how hard you worked all those years to suppress the business’s profit (on paper) so you could pay less in taxes? Are the kids really qualified to run your business without you, or will they run it into the ground? Statistically speaking, each subsequent generation of owners increases the risk of failure. You could do a hybrid exit model where you gradually back off, working fewer days per week but remaining available to “keep an eye on things and protect your flank.” Here again, your implicit assump- tion is that you’ll not have been prema- turely called back to the mother ship and will be healthy enough to function in a leadership or managerial role. Some Sensible Steps to Take Obviously, the younger you are and the more people who depend upon you and your income, the more vulnerable you will be. Even if you have not yet developed a clear exit strategy, there are some things you can do to improve your situation. One step is to have your business buy life insurance on you. It’s common for companies to purchase what’s called “key man” (you can call it “key woman” or “key person”) insurance, and some lend- ers will insist on such coverage as part of a risk hedge. It’s a bit like a home mort- gage lender requiring PMI (private mort- gage insurance). Typically, if you have a conventional mortgage loan and your down payment is less than the traditional 20% requirement, you’ll need to carry and pay for PMI, at least until you develop adequate equity. This reduces the lender’s risk, and the borrower is paying for it. If you’re the lender, what’s not to like? This reminds me of long ago when I held a mortgage brokers license, which was required when transacting business deals (finance of startups, mergers, ac- quisitions and business recapitalizations) where assets included real estate. NOVEMBER 2020 KEYNOTES 17
