"Begin with the end in mind," says Stephen Covey in his book Seven Habits of Successful Living. Those who have created a successful business know it does not happen without planning, hard work, and a little luck. Yet most have no plans for leaving their business, ever.
Entrepreneurs are optimists, but all of us will stop work one day. The truth is that most business relationships do not have a happy ending. The question is: Will it happen as I want or will it just happen?
Research in the UK indicates that 75 percent of small to medium-sized businesses have no exit strategy. In Canada, 92 percent of entrepreneurs say it is a good idea to have an exit strategy, but only 44 percent actually have one. In the US, more than 20 percent of small industrial business owners had not even thought about exiting their businesses. Even professionals like physicians, dentists, and veterinarians are ill prepared for exiting their practices. A survey of this group indicated that 96 percent believed that poor planning left them unable to exit their businesses on their own schedule.
Life shows us that we have to depend on ourselves. Yet we continue to believe someone else will someday take care of us. We will live on Social Security and income from the business that we created. The idea that your business will strive on to provide you income after you are no longer there is to believe that you have money in a Social Security account. Your company will not work for you after you are gone and there is no money in your account with Social Security. Still, we believe. It is time to look at reality.
You will leave your business in one of four ways. I call it the "The Four Ds of Leaving:" death, disability, divorce and departing. To have a successful business, you must plan for all Four Ds.
For the individual each one of the Four Ds has special demands on family, income, taxes and transfer of control of assets. The concern of the business is different. Your business is a separate entity and your concerns for family and income will conflict with the business desire to continue. The solution to the problem is mutually fair agreements and enough money.
Fair agreements that take in the concerns of all parties negotiated at the beginning of a business relationship will allow the participants to handle transitions when relationships change. And relationships will change. The agreements, commonly called buy/sell agreements, are used to handle the Four Ds. Unfortunately, many buy/sell agreements only address death at the urging of a life insurance agent. At the meeting, you arbitrarily decide how much insurance you can afford and how much your company is worth, when in fact you do not know.
Death is not as likely to end the business relationship as disability. If the person is important to the business, the financial strain is felt as keenly by the business as by the family who depended on the income. If the business is faced with choosing between survival or paying the disabled partner, it will survive.
You can imagine the torn feelings if a disability occurs, but what if the partners cannot get along? How do we split a partnership without financially ruining each other? It may be complicated by many personalities, some may not even be a part of the dispute, yet may be affected financially.
You may all be happy working together, but your partner or you may decide to leave for another opportunity or simply to take life easier. Who is going to do the work? What is owed the leaving partner? Where is the money coming from?
A number of questions cannot be handled in this article, but there are certain things that must be done: - The business needs to be incorporated into a formal relationship that legally recognizes that you and your business are separate entities - Devise a method determining the value of the corporation that can be done at least annually and will qualify under IRS standards - Develop an employee benefit plan that will assist with the departure of each partner in case of death, disability, or retirement - Finally, if we cannot get along or simply want to leave, who gets the company and who gets paid off and in what manner? If you think these decisions are hard now, try to make them in the heat of the moment. You have to think as if you are the one who wants to leave as well as the one who wants to stay. It is not easy.
The "Great American Dream" is to create a business of your own; to bring it to life and make it successful, financially. A truly successful business is one that makes you financially independent. How you leave will determine your financial success and that of your family. Just as building a successful business takes planning, hard work, and a little luck, so does leaving it.
Brent Dees, CFP, CSA is president of Brent Dees Financial Planning, http://www.brentdees.com, and a coach to small business owners, teaching the Focus Four system of personal and business goal-setting.