Last week, we looked at how an owner’s emotional attachment to the business can prevent them from turning their lifestyle business into a business enterprise. We know that for business owners to exit their businesses successfully, they must transform their lifestyle businesses into business enterprises. Today, we’ll look at two obstacles that owners often create for themselves that prevent successful business exits. We’ll also present ideas for how advisors can help them break down those obstacles.
An Owner’s Pride
Business owners tend to be proud people and for good reason. Many of them build their businesses from scratch; get their hands dirty growing the business; and maintain businesses that support families, employees, and communities. The idea that they must let go of the reins someday or begin to do things differently now may be difficult to accept.
For example, we’ve discussed how next-level management is necessary to build business value. When owners are confronted with the fact that there’s likely someone out there who is more capable of increasing the business’ value than they are, it’s a challenge. Most owners are reluctant to delegate responsibilities. But it doesn’t change the fact that if owners want to exit their businesses on their terms, they must either have or find people who can run the business in their stead. Buyers buy successful businesses, not successful lifestyles.
Advisors must clearly explain to owners why they must do things like delegate their responsibilities. Once owners understand why they must do those things, it’s the advisor’s responsibility to show the owner how they can do that. For example, if the owner needs to develop a next-level management team from scratch, the advisor can create plans to seek out next-level managers. If the owner wants to groom current employees to be next-level managers, the advisor can create a different plan to spur that.
When advisors demonstrate how they can help owners take their businesses to the next level, owners become more open to committing to doing what they must to allow them to exit on their terms. This includes important actions like acquiring next-level management, adjusting operations to increase cash flow, and ultimately letting go of the reins, turning a lifestyle business into a business enterprise.
An Owner’s Resources
Many owners think that they don’t have the resources—specifically, time and money—to turn their lifestyle businesses into business enterprises. For some owners, this might be true. But many successful business owners have more time and money to plan an exit than it may seem.
Consider some of the factors that turn a lifestyle business into a business enterprise:
- Next-level management, which ends up running the business and, by definition, increasing its value.
- Strong and documented operating systems, which increase efficiency and cash flow.
- A proven growth strategy
- Sustainable recurring revenue
Each of these factors has three things in common: They increase the amount of money owners have. They decrease the amount of time owners spend running the business. And they’re all essential elements of Exit Planning.
Every buyer wants an owner’s business to be a business enterprise. Turning a lifestyle business into a business enterprise requires teamwork, solid planning, and the ability of owners and advisors to talk with each other on the same terms. When business owners begin transforming their lifestyle businesses into business enterprises, that’s when Exit Planning truly begins.
- Many small/mid-sized business owners have lifestyle businesses. To exit them on their terms, they must transform them into business enterprises.
- Business owners typically face three roadblocks to transforming their businesses, and advisors must guide them around those roadblocks.
- Buyers buy successful businesses, not successful lifestyles. A successful lifestyle business is usually worth more to the owner than any potential buyer, which makes it difficult to exit when the time comes.