6 pitfalls to avoid when leaving the industry
Successful HVAC construction and sheet metal business owners know how to run a business and the ability to adapt and compete in a constantly changing work environment.
However, exiting a business requires an entirely different set of skills.
The knowledge gained in managing and growing a business will not necessarily prepare you for exiting a business. In other words, what got you here will not get you there.
Having a well-structured, written exit plan is the essential first step. This complex process requires specialized advice from your accountant, business appraiser, tax adviser, corporate attorney, estate planner, financial adviser and insurance adviser, among others. A common problem that can transpire during this process and derail an exit strategy is the lack of coordination among the specialized advice that is communicated by the various professionals.
Coordinating and understanding the often-disjointed advice can be overwhelming to a business owner who is not familiar with these concepts and terms. Having an adviser who understands and can coordinate the moving parts is critical to your success.
The U.S. Small Business Administration says, “At any given time, 40 percent of U.S. businesses are facing the transfer-of-ownership issue. The primary cause for failure … is the lack of planning.”
Most owners have more than 70 percent of their wealth trapped inside of their illiquid business. Many studies have shown that fewer than thirty percent of business owners will actually sell or transfer their company. Many simply end in liquidation, or 10 percent of their value.
This article will focus on six common “traps” that first-time exiting business owners tend to fall into, often leading to an unsuccessful exit and financial and/or emotional agony. To avoid falling into these traps, understand them and then plan ways to execute your exit plan.
‘It’s not that hard’
The exit can be complex and taxing on a financial and emotional level. You cannot spend 30 to 40 years of your life building a business without a strong emotional attachment. Business is not just what you do — but who you are.
Building your business is a daily challenge — it requires a flexible plan and the ability to adapt, execute and compete in your ever-changing marketplace. Successfully exiting your business could, however, prove to be even more challenging than simply running your business.
According to ROCG CEO Ronen Shefer, an average of 80 hours are spent writing a business plan to grow a business while, on average, only six hours are spent planning the business exit.
Your business is your largest investment. Take the time to plan, revise and execute your exit strategy — it will save you time, money and headaches in the future.
‘I will just sell my company’
Selling is, in fact, only one of several exit strategy options available to owners who desire to step back, or exit entirely, from their businesses. As alternatives to selling your business to a strategic buyer you have the option of a management buyout, creating an employee stock-ownership program, exploring “gifting” strategies and selling partial company interests to a private-equity group.
All are viable options for the owner and should be considered by owners and advisory teams. However, only after the owner has established and clearly communicated his or her goals should an exit strategy be selected. Once all options are explored, an informed exit decision can be made.
You need to prepare for other options even if you want to sell. Why? According to a study by the U.S. Chamber of Commerce, fewer than 20 percent of the companies that go to market actually sell. According to FMI Corp., it is more like 10 percent in the construction industry.
The good news is these internal exit options, if properly structured, can offer the most tax-efficient options.
The most common type of exit for a contracting company is a management buyout. An exit goal for many family-owned construction firms is to sell to their family members, managers and/or employees. The good news is these internal exit options, if properly structured, can offer the most tax efficient options. The bad news is that many advisers use cookie-cutter methods that will clobber buyers and sellers with taxes that can exceed 55 percent.
‘This won’t take much time’
If you typically ask owners when they want to retire, many will say, “In five years.” And when you ask the same question two years later? The answer is still “In five years.” This is a clear indication of how difficult and emotional getting out of a business can be.
The procrastination comes from two very common characteristics. First, the process itself is very intimidating. Fragmented advice can lead to confusion and an inability to make a decision.
The second characteristic is the owner’s fear of outliving his or her money in retirement. Only after an owner can envision his or her financial future can the planning and execution of the exit process proceed.
Only after owners can see their financial future can they proceed with the plan and execute the exit process
The truth, however, is that an exit strategy should ideally be created along with a business plan and then be assessed and adapted as necessary over the life of the business. A properly written exit plan should provide the owner with one common goal supported by several “mini” goals that help support the overall strategy.
There is one similarity among all business owners. They will all eventually leave their business. The question is, will the owner control the process or will the process control the owner? Providing an adequate amount of time and effort will help achieve greater odds of success.
Many sellers procrastinate until they are finally ready to exit the business. They do not understand that the preparation process can take up to two years and the departure up to 12 years, especially with a management buyout.
Exit planning is about much more than monetizing the business. It is also about protecting what you have built until the transaction takes place. It is prudent to have the company in sale-ready condition should you decide that your exit timing has changed due to external factors such as health, family issues or just the feeling that you are ready to get out.
Having your company in sale-ready condition is just good business that will give the owner more options, improve the company’s value and give the owner more control of the selling options.
‘I can do this with my accountant’
Many excellent accountants have guided owners through financial tribulations over the years. However, an exit planner is a holistic adviser who has studied several disciplines, understands the variety of “tools” used in the process and is trained in the exit-planning curriculum.
The best way to understand the role of an exit planner is to assimilate this adviser to the duties of an architect. An architect understands and designs every part of constructing a building but probably cannot wire or perform HVAC construction or ductwork fabrication for the house.
Exit planners work in a similar fashion. They design the exit plan, creating a blueprint for the business owners and their advisers as a way to understand and coordinate the process in order to meet the owners’ goals. The exit planner does not write the legal documents, recommend investments or prepare estate planning documents. Exit planners are designers and process consultants.
After the plan is written, it can take several months for owners to pick the path and strategies from many hours of coaching with the exit planner. Then the plan is given to your professional advisers for execution with the exit planner and the owner leading and coordinating the process.
Not coordinating the business, personal and financial wealth
A complete exit plan should encompass an owner’s three main planning areas in his or her life:
- Business planning: Valuation, succession, taxes, transfer options and litigation
- Personal planning: Owner’s goals, emotional ties to the business, family members involved in the business, and legacy
- Financial planning: Overcoming the fear and reality of outliving your money, protection for family and spouse in the event of a catastrophe, and taxes
The good news is that much of the planning is being provided by advisers. The bad news is that the lack of coordination between these main areas of focus can lead to unanticipated consequences that could lead to:
- Destruction of the family unit
- Liquidating the estate to pay taxes
- Litigation among other business partners
- Costly legal bills
- The obliteration of the business
Exiting can be very taxing
The exit is also very taxing from a financial perspective, where you can surrender more than 55 percent of your after-sale proceeds to taxes at the state and federal levels. In addition, each path has a different value, tax consequence and financial compromises.
Remember: It’s not what you get for the business that matters, but, rather, what you get to keep. Exit planners have a variety of tools that help support the owner in achieving his or her goals:
- Internal revenue codes
- Individual insurance companies
- Life insurance
- Qualified plans
Using these various legal tools can significantly reduce or, in some cases, eliminate taxes.
With a properly planned exit strategy, the owners know — before deciding how or when to exit the business — which options will provide the greatest after-taxes and after-fees net profit. This puts owners in control, able to see the financial future and to feel confident that he or she will not run out of money in retirement.
Selling your business is probably the largest financial event of your life. No matter where you are in your business life-cycle, creating and routinely adapting a written plan for your business exit strategy is a critical part of planning your exit. Through examining these six exit strategy traps, you will be prepared to avoid these obstacles during your own exit.
Remember that your business is an investment, and, as with any investment, you must study and plan in order to create the most financially and emotionally profitable outcome. You need a plan in order to beat the odds.