“Creating Successful Transition Series”
by Stephen Ferraro, CPA/ABV/CFF, CVA, CEBC, MAFF
This article shares findings from an ongoing research effort being conducted by an affiliated organization, the International Exit Planning Association (IEPA). We are members of the IEPA, which is a national leader in the emerging field of exit planning. The research, which we have participated in over the past 5 years, reveals that 83% of business owners who are considering a future exit from their privately-held business currently have a Low Mental Readiness for their exit. In this article we discuss these findings and provide insights for owners of privately-held businesses to learn how you might begin planning for your own business transition or exit in the future by knowing more about what your peers are thinking and doing.
Exiting Your Business, Protecting Your Wealth – Financial and Mental Readiness
In October of 2008, John Wiley & Sons published John Leonetti’s book, Exiting Your Business, Protecting Your Wealth – A Strategic Guide to Owners and Their Advisors. This seminal book on the topic of exit planning provides a system for owners and their professional advisors to plan a business exit. This exit planning system provides two (2) initial components that an owner should assess – their Financial Readiness and their Mental Readiness for a future business exit.
An owner’s Financial Readiness is simply a measurement of the amount of wealth that is held outside of their business, and/or other sources of income, that can supplement the value of the business for the maintenance of their lifestyle.
A business owner’s Mental Readiness is an indication of how much longer the owner would like to continue working in their business. For example, a business owner with a High Mental readiness is someone who is NOT enjoying working in their business today and would like to move on from the business. However, a LOW Mental Readiness reflects an owner’s desire to continue working in the business because they enjoy the continued challenge and thrill of running their business.
Business Exit Readiness Index Assessment
In order to understand an owner’s Financial and Mental Readiness, the IEPA created its Business Exit Readiness Index™ (BERI) Report. This ten (10) minute assessment includes twenty (20) questions that rank an owner’s exit Readiness in these two categories.
The data presented in this article are the results of two thousand four hundred and eighteen (2,418) owners of operating companies who have completed this BERI™ assessment. The results provide a view through which we all can better understand an owner’s attitude and preparedness for their future business exit.
BERI™ Report Survey Results
As mentioned at the beginning of this article, 83% of business owners who completed the BERI™ survey stated that their Mental Readiness to exit their business was LOW. This means that 83% of business owners who were curious enough to take a survey that asked them about their “exit readiness”, responded that they are NOT ready to exit their business. This interesting fact begs the question: “why did the majority of owners who completed the BERI™ assessment rank LOW on the Mental Readiness score?”
Traits of LOW Mental Readiness
The following attributes apply to the 83% of owners who have a LOW mental readiness for an exit. As a group, they generally:
- Have no written plans for an exit
- Have not thought about a future without them working in their business
- Take less than 3 weeks of vacation per year
- Are performing at the “top of their game”
- Lack the management team to replace their responsibilities at the company
- Continue to have a high level of enthusiasm to work at their companies
These traits vary in degree amongst different owners who completed the BERI™ report but are the general areas where they all reply positively to the survey questions.
How Can You Apply These Survey Results to Your Exit Plans?
As you review the list of traits in the preceding paragraph regarding owners with a LOW Mental Readiness, you may see many that apply to you. If so, you may begin to consider your own mental readiness for an exit and how this could impact your planning. And, notably, if your desire is to continue to run your business into the future because owning and running your business is what you enjoy doing, then you are in the majority with your peers.
However, our important message to you in this article is the following: just because you desire to remain with your business does not mean that planning should be ignored or put off until a later date. In fact, “exit planning” does not (and should not) mean that you are leaving your business. Rather, planning for an exit includes growth planning (i.e. increasing the cash flow and value of your business), leadership planning and development (so that the business can run without you), personal planning (so that you have the peace of mind that you can afford an exit) and contingency planning (to assure that you don’t lose what you created if something unforeseen should happen to you). These are all very important areas that you can plan for today, even if – like a majority of other owners – you do not plan to exit for a number of years.
We hope that this article has accomplished the objective of having you understand what your peers are thinking and doing for their exit plans so that you can better define your own. Also, if you would like to measure your own readiness for an exit, click here to take the BERI assessment.
Whether you are interested in a strategic business valuation, growth plan or an exit plan, feel free to reach out to our team and we will be glad to have an initial conversation with you about these useful forms of advanced planning.