Key Takeaways
Your business may be worth a lot more than you think.
Start your transition planning process at least five years in advance.
Know how much you’ll need in retirement. Travel and medical spending may be higher.
Begin with the end in mind. Steven Covey explored this idea in his book, The Seven Habits of Highly Effective People. I mention this mindset because you’ve worked hard to build your business throughout the years. While you dedicated yourself wholeheartedly to your customers and ensured their satisfaction, you may have overlooked your own needs regarding retirement or embarking on a new venture. Many entrepreneurs are surprised to discover that managing a business can sometimes be more straightforward than handling their personal goals and financial needs. If you find yourself in that situation, read on.
I’ve found there are three primary elements to a successful transition from your business:
1. Personal financial planning.
2. Business succession planning.
3. Legacy planning.
My colleagues and I have posted extensively on the first and third topics. Here I want to discuss succession planning. With that in mind, you may want to change how you think about your business. Your business is likely worth more than just the steady paycheck it’s been providing you with over the years. It may be worth more than just the value of your equipment and inventory. In addition, your customer lists, land, buildings, specialized processes, procedures, and expertise could be highly valued by a new owner – especially with your brand name attached to it. So where do you begin?
Don’t Wait Until The Last Minute To Plan Your Exit
Business owners often mistakenly believe they can sell their business with minimal preparation before going to market. Avoid falling into that trap. I always advise successful business owners to start their exit planning at least five years before they want to transition out.
This is where Covey’s recommendation to begin with the end in mind comes into play. It's crucial to start early with personal financial planning, including: setting goals and understanding your financial needs. Once you have clarity about these goals and needs, you can look at your company to determine what is needed from the business. Please know, we do not take this step lightly. Most people have not done this planning exercise with any structure or importance. When you do, the results and satisfaction are tremendous.
A business owner has a slightly different perspective to consider. It's not unusual for business owners to take their business with them everywhere they go. Therefore, it is crucial to carefully consider how you will spend your time when you suddenly have 40, 50, or even 70 hours a week available. Have you developed enough hobbies, passions, and causes to fill your time? Have you discussed with your spouse how they’ll feel about having you around the house 24/7? How will your identity change when you’re no longer the founder/owner of XYZ Inc.? How will you answer the question “What Do You Do?” when meeting new people at a social event? Don’t take these questions lightly.
Optimal transition outcomes are achieved when owners reach a stage where external
interests become so significant that work feels like a distraction. However, it is essential first to acknowledge that a change is imminent. Recognizing this allows you to commence the necessary planning and embark on a journey of self-discovery. Some business owners become so engrossed in their work that they lose sight of the broader perspective and the finite nature of our time on Earth. Don’t wait too long to start planning your transition. Begin the process of self-discovery and planning while you still have your health, vitality, and loving connections. If you have other passions, feel fatigued, find the business less enjoyable, or face serious health challenges, start planning your transition now. Early planning leads to better outcomes and minimizes financial loss.
Many entrepreneurs love what they do. That's great. But even if that sounds like you, be mindful of how unlocking the value within your business is key. Well before your planned exit, you should have conversations with owners of similar businesses and ask them if they’d someday be interested in acquiring your enterprise when you’re no longer at the helm.
How To Maximize The Value Of Your Business
Succession planning is a crucial part of maximizing the value of your business. The process will help you either continue to take a paycheck for a much longer period or transform your paycheck into a viable asset for sale. Here are some important next steps:
1. Ask yourself: "What is the purpose of my company?" Your management and staff must grasp this concept too. This understanding is critical for fostering buy-in and inspiring them to see themselves as stakeholders rather than just employees.
2. Ensure you have the right people in the right positions. Step back and analyze what drives your company's success. Focus on the tasks required to deliver your product or service, and draft job descriptions accordingly. Compare these responsibilities with your current staff's capabilities and consider retraining or hiring new employees if necessary.
3. Start to systematize and document all activities needed to create the products or deliver the services. As you develop these processes, look at how you can monitor your expectations. Find ways to get feedback about the success of each of these items. This will help you create a scalable operation you can manage in place of doing everything. When you manage, you can expand the number of widgets created or the people you serve. The primary benefit of being a manager rather than a doer is that you can objectively monitor the success of others running your systems thereby fulfilling the company's purpose.
4. Regularly assess and manage your ego throughout this process. While you possess valuable insights into what works, you won't have all the answers. Collaborating with a team accelerates progress and enhances the completeness of your design.
Taking these steps requires time and careful thought so, begin at least five years ahead of your reduced involvement. However, once you have completed this process, your potential to realize the value of your business increases significantly. Then you can hire employees to handle the work and managers to ensure the processes run smoothly. This will allow you to live off the profits for the foreseeable future. Alternatively, you will have a viable, saleable business. In either case, you can start exploring other hopefully rewarding options in life.
You owe it to your family, employees, and community to ensure a smooth transition. Now that we’ve discussed how to unlock the value, my next post will discuss the logical next steps.
Conclusion
If you are considering a transition from your business, or someone close to you is, please feel free to contact me any time to discuss. I’m happy to help.
ROBERT B. DUNN, CFP® is the President and Managing Partner of Novi Wealth
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