The Elastic Exit: the painful process of business exits by owners

Traditionally, business owners would be able to simply list their businesses and in a matter of hours, they’d have interest. From that interest, in a matter of days, they’d have offers on the table. And from those offers, in a matter of short weeks, they’d be walking out with a briefcase full of money into the sunset.

Unfortunately, as time passed by, selling a business has become increasingly challenging. Worse yet, according to the Exit Planning Institute, a good 90% of the businesses that are listed for sale, never successfully sell.

Another challenge has become the time frame in which a business owner can comfortably walk away. In the past, exits were completed in a matter of short weeks. Nowadays, it can take up to 2 years. With this new paradigm, business owners are finding it increasingly difficult to complete a successful transaction.

Of course, the question now is, how do business owners successfully exit? And more importantly, how can we shorten the time horizon of those exits?

The underlying issue was never really with the business owners. It has more to do with the expectations that are created around them. In reality, business owners generally get offers from business brokers to facilitate the sale of their businesses. Why? Simply because tradition “dictated” it to be so.

Unfortunately, the system is broken. It is so broken that the listed businesses that fail to sell are in fact, listings from business brokers. Why is there such a huge discrepancy?

Truthfully, expectations that are created follow a series of characteristics. It all starts with creating unreasonable goals. Business brokers have a tendency of infatuating the reality of the situation that the business owners are in. This fictitious mindset creates a level of discrepancy in how business owners play a role in the exit.

They are mostly told that they will have a lot of interest and that there are active buyers in the “marketplace.” Unfortunately, in most cases, those “interested parties” or “investors” are scouting opportunities to either undercut or sweep a business off their feet based on the opportunities that they can create. With that said, most businesses fall short in that category.

Investors play a key role in how exits are influenced. Unfortunately, a majority of the money is sitting in highly “liquid” stocks and investments. This creates a huge rift and causes catastrophic issues. In simple terms, the majority of the funds are barely touching the backbone of the economy. After all, 90% of the economy circulates based on small and medium-sized businesses. The creation of jobs to economic recycling is all based on these SMEs.

Another common issue that business brokers approach owners with is the concept of “comparison.” They would take a piece of article from a famous newspaper and point towards a story like Mark Zuckerberg or Bill Gates. Yet, what they fail to provide is the details on how those milestones are achieved. Notably, the fact that companies such as Facebook and Microsoft aren’t everyday stories.

For a business owner to reach financial thresholds such as the fortune 500 companies requires tremendous reach, years of capitalization and ultimately the right connections in the right areas to execute such a sizeable transaction.

Are business brokers crippling the exit potentials of business owners?

Unfortunately, the majority of business brokers are swayed by the wrong idea. They are in it for their “fees” and focus very little on what truly matters for the business owner. Sure, getting the business to the finish line gets them their “percentage.” Yet, there is a huge bias in that process.

If the broker approaches a business owner with intent to charge a fee, there is nothing else holding the broker back from churning and burning that bridge to quickly scout his or her “next opportunity.” In essence, rinse and repeat without any real outcomes.

Whereas, if you were to take the model where brokers would only be compensated based on a successful exit, all of a sudden, you’d have very few brokers offering their services to the business owners.

The reality is this. Business owners need to concentrate more than ever on adding value to their companies. This includes adding value throughout the negotiation and exit process. Why?

When business owners focus on adding more value to their bottom line, prospective buyers who are financial or strategic in their nature, will see the potential and offer a larger cheque. In essence, business owners will be commanding more money.

However, most business owners are not equipped to deliver those outcomes to their prospective buyers. This is the single biggest reason why negotiations are unfavourable to the business owners who are exiting. This means that business owners are leaving a lot of money on the table.

What started as a dream is now their worst nightmare

From the moment that the business owners envisioned selling their company, they have already left “mentally.”

They are mostly thinking about which beach they will be visiting during the week, which restaurants they will explore the weekends, which vacation spots they will visit next and what kinds of people they will soon meet.

Little did they know; their dreams were about to be interrupted by the harsh reality of things. And suddenly, from mentally being in paradise to waking up to their worst nightmares has become their new reality.

In the process of the daydreaming and mentally exiting, their employees start to talk among each other about how safe their jobs would be. Suppliers are starting to notice carelessness. Lenders are closely monitoring accounts. All the while, the value that they had planned to extract from the eventual exit, has slowly started to diminish.

Most business owners make the mistake of mentally exiting before they receive any money in the bank. Again, going back and referencing the false realities and dreams that they are fed by business brokers, it’s a common trend.

Shut the doors and let them go

Often, out of desperation and nowhere to turn, the business owners end up shutting the doors and letting their staff go. This has become an increasingly popular trend among distressed business owners. Unfortunately, there are consequences to this.

When business owners are left with no choice but to walk out, they are usually very frustrated, have a lot of bottled up emotions and are unable to think straight. This also means that there is a great amount of tension caused between employees, suppliers/vendors and the individuals that are impacted by that one business.

Mentally, this is a very painful process for a business owner. They are at an all-time low and have given up every ounce of hope. They are already thinking about what they will tell their families, and most probably, tensions have already been created at home.

Generally, when business owners have focused so many years and countless sleepless nights on keeping the business alive, energy is not given at home. The kid’s baseball games are missed. Special family ceremonies are skipped due to the owner’s demanding schedule. And ultimately, the husband and wife start arguing at home. So much so that there is a high rate of divorce due to the wedge that is driven between family and business obligations. Not to mention the financial strain that it causes.

From everything until this point, the business owner is going through an “elastic exit.” This process is my terminology for the pain it causes when ideas, execution and expectations rebound, causing tremendous pain, frustrations and disappointments.

Is there a more reliable, safe and riskless way of exiting? More importantly, are there resources to help plan a successful financially healthy exit?

The outcome of successfully exiting with a healthy financial outcome boils down to one key thing. The willingness of the business owner to be open-minded about the different possibilities.

Objectively, business owners will need to realize that at times, it’s better to be open to ideas that will give them a progressive path towards reaching their financial goals. Sure, it may not be as glamorous as they thought it was. Yet, it serves the purpose. It gives them clarity and ultimately gives them an evergreen sense of positive reality.

However, there are sacrifices that need to be made. And yes, that includes actively participating in the exit planning phase. After all, the goal is to get a healthy financial sum at the end of the day.

There are several different possibilities for the business owner

The first option is where the owner can either hire a professional firm that is accustomed to financial and business transformation. These firms are usually very resourceful and can usually bring a lot to the table. The only downside is that they are very expensive. Yet, the outcome created far outweighs the costs. Ultimately, it’s an investment that pays back in great multiples.

The second option involves coming up with a list of prospective competitors and asking them to consider adding their resources and expertise into your business. Of course, this process requires you to give up a good portion of your equity in exchange for their help. The other issue then becomes the concept of having two chefs in one kitchen. Who’s going to be running the show? Who will be calling the shots? How will the major decisions be made? As you can see, this option is really not the most favourable but can work out if the collective goal of both businesses is to reach a greater audience base and create the economies of scale by managing effectively.

The third option is to work with what I refer to as a value-driven exit partner. In this scenario, the business owner will work with an experienced well-rounded business expert who has the tools, resources and strategies to successfully execute a financially healthy exit. The upside is that the business owner will be working hand-in-hand with a professional who’s on their side.

Working with a value-driven exit partner is the most ideal scenario for business owners. Not only will they get an active professional strategist whose interests are focused on creating financial outcomes and to drive the value of the business up, but they will also be held accountable to the actions and processes involved with each step of driving the business forward. This process is hands-on and provides the ideal route to a successful exit.

If you’re interested in exploring this avenue as a business owner, I invite you to contact me directly by writing to [email protected].

Upon receiving your initial email, I will send over a questionnaire that will give you instant access to a realistic model which demonstrates how ready you are when it comes to exiting your business. Through that, I can also provide you with insights on what possibilities you would be able to explore.

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