This article continues our series describing the advantages and disadvantages of the five primary Exit Paths that business owners might choose. In our last article, we showed you some advantages business owners experience when they specifically plan to work until they die (rather than simply not having a plan to exit). Today, we’ll examine the disadvantages of having no plan to exit at all. As always, our goal is to introduce important issues so that business owners, Exit Planning Advisors, and Advisor Teams can communicate and strategize on the same terms.
According to The BEI 2016 Business Owner Survey Report, 83% of business owners have no written Exit Plan, even though only 9% of owners claim that they want to stay in their businesses forever. We’ve discussed how a failure to have an Exit Plan—even if owners have no interest in exiting—can do harm to a business’ value. But does the same idea apply to business owners who actively plan to die at their desks?
Let’s look at six challenges that business owners face when they want to stay in their business forever but have no plans, and examine how planning for an exit can strengthen owners’ businesses in terms of value, performance, and future potential, even if those owners exit only at death.
Challenges of Having No Exit Plan
Challenge 1: Financial Security
Business owners who decide that they will work until they die likely enjoy financial security via ongoing compensation and cash distributions from their businesses. However, keeping the business indefinitely subjects owners to ongoing business risks, from economic downturns to structural changes within the company’s business niche. As business owners age, it may be difficult to make constant and necessary business adjustments to deal with the fast pace of an ever-changing business environment.
With age often comes health issues, and for business owners who plan to stay in their businesses forever, poor health can affect their personal performance, which in turn can affect the performance of their businesses, which they rely on for financial security. Additionally, business owners who never want to exit often feel no need to delegate responsibilities to others, which can negatively affect their financial security if they ever become ill or seriously injured, and cannot run the business at full capacity.
Challenge 2: The Time Factor
In one sense, time is not a factor for business owners who plan to stay forever: The only thing that will affect their time in the business is death or permanent incapacitation. However, business owners who choose not to plan for their exits actively sacrifice their free time for the sake of the business. If those owners ever have a change of heart—which is relatively common—they may find that they don’t have enough time to adjust and fulfill their wants.
Challenge 3: The Time Margin
Business owners who decide to remain in their businesses indefinitely likely feel little pressure on their time availability, since they’re comfortable dedicating all of their free time to work. But like the time factor, a change of heart or health can leave owners without anything to do or live for if they don’t have a plan to exit their businesses.
Challenge 4: Tax Consequences
Because of the step-up in tax basis and high estate-tax exemption, owners without an Exit Plan typically face minimal tax consequences. Of course, this assumes a strong status quo at the company.
Challenge 5: Values-Based Goals
A business owner’s post-exit goals, such as benefiting employees and the community, or maintaining the legacy and culture of the business, may be difficult to achieve unless advisors prompt them to plan for an inevitable transition. This includes preparing the business to run well without the owner. Without an Exit Plan, owners of businesses that rely on their presence for their success can quickly falter and even fail. This means that business owners who have goals outside of “work until I die” make themselves vulnerable to unanticipated events that can harm or destroy their businesses.
Challenge 6: Successor
Business owners who choose to stay forever and who are the go-to person for all business decisions expose their businesses to the risk of dying with them. Because many owners who choose not to exit often refuse to delegate company responsibilities, any harm that comes to the owner can transfer to the business, its employees, and its clients.
The challenge is to have management succession planning in place before the ownership transfer event occurs (in this case, before the owner dies). Doing so insulates the company from risk because successors—whether they’re insiders, third parties, or family—have an idea for what to do to keep the company running and how to best do it. Exit Planning focuses heavily on estate planning, so neglecting an Exit Plan can mean that estate plans suffer as well.
Additionally, advisors must carefully craft owners’ estate plans and put them in place as soon as possible. The estate planning documents must spell out a comprehensive succession plan, unless the owner plans to liquidate upon death. This is also true for the estate plan of every owner—even the 91% of owners who contemplate, but haven’t yet planned for, a lifetime exit.
Addressing These Challenges
Of all the challenges among all of the possible Exit Paths, the way to overcome the challenges of having no plans to exit is most obvious: start Exit Planning. While many business owners who initially decide not to exit tend to think they have to do everything on their own, that’s not true of Exit Planning. BEI has developed a variety of bespoke designs and tools to minimize or eliminate the challenges in no-exit exits. These designs and tools are part of the pre-sale planning and execution process that focuses on achieving all of an owner’s goals and aspirations.
Keep in mind that the actions required to mitigate the challenges described here may take years. Business owners typically wait to begin planning to transfer ownership of their companies until they are ready to exit. When owners have decided never to exit, advisors must question them about the consequences of a premature death or long-term illness. After all, preparing a business for its owner’s exit due to death or incapacitation, and ensuring the owner’s family continues to benefit from business ownership, requires the same preparation and focus on growing and preserving transferable value, and selecting a capable successor, as does an exit guided by an owner’s pre-determined departure date.
With this article, we conclude our series on the advantages and disadvantages of the five primary Exit Paths.