Planning For Your Exit Despite This Tough Economy
Dec 29, 2009
It was recently said that talking to business owners about long-term planning in today’s economic environment is a bit like a doctor telling a critically wounded patient in an emergency room that ‘they need to exercise more and watch their diet to be healthy’. Of course, the emergency room patient is focused on his or her short-term needs, such as fixing whatever put them in the emergency room so that they can go into a recovery mode and, hopefully, restore their lives to a normal status.
We all know what the problems are today with our small businesses – consumer confidence is shaken, purchases are down, accounts receivable are tougher to collect, everything seems more expensive, the banks are hesitant to lend us the money to meet our growing working capital needs, and, because this recession is almost two (2) years old, it all seems like it will never come to an end. These all seem like very good reasons not to be setting aside time for exit planning. But that is faulty thinking which can lead to disastrous results.
If you study the 10-year cycle of business transfers you can see why, despite the terrible economy, today is the optimal time to begin planning an exit. For the last three decades, the cycle of business transfers follows a rather predictable trend. The first two years of each decade have been a buyer's market, the middle five years a seller's market and the last two years have been a near or absolute recession. And, right on schedule, the economy tipped downward in 2008 and has continued this slide in 2009. The difference in this cycle was the severity of the downturn – this was not predictable.
When we project out over the next three (3) to five (5) years, we see that a ‘window’ for a business exit will open again. The question is, ‘will owners be prepared to take advantage of this exit window or will they still be holding onto their business, without an exit plan, into the next recession?’
This recent economic storm has broken the ‘status quo’ psyche for most owners. For the most part, owners now operate under a new thought process, one which says, ‘look, I’ve been through a number of these recessions before, but this one really hurt. I’ll survive it, but I don’t want to go through another one’. It is the inertia of the ‘good enough’ mentality that has been broken. And, the proper way to address this new reality of today’s economy is to begin doing some advanced planning against future contingencies. Beginning the process of developing an exit plan is a great first step in taking inventory of what has occurred and setting a plan to be ready for an exit prior to the next downturn.
So, one may ask, ‘why start today when the next downturn is years off? The answer is that it can take many months to develop an exit plan and many more years to execute that plan. For example, it can take nine (9) to eighteen (18) months – or more – to sell a business. This, of course, assumes that the business is ready to be sold and that an outside buyer is willing to purchase it. Further, in the absence of any succession planning, a time period for grooming the next level of management is approximately five (5) years – again, if all goes well.
The problem here is that the owner who uses this economy as an excuse not to plan their exit will miss the opportunities that are available today. Not the least of which is the long stretch of time that it takes to properly prepare for and execute an exit.
In conclusion, most owners have always realized that, despite their best efforts, they are vulnerable to economic swings. This recession, however, carries with it the additional reminder for baby boomer owners that there may be only one (1) more exit window before they are 70 years of age, or older.
Since the majority of the average owner’s total wealth is tied to their business, it is more important than ever to plan for their exit while still in the midst of this recession.