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The Role of Emotion In Business Exits

“For years, my Exit Planning goal was to get out of my business on my terms. But I didn’t act until I saw the consequences of inaction staring me in the face.” –A Former Business Owner

Most business owners know that they need to plan for their business exits. Once they begin the Exit Planning Process, they often find relief in the actions they can take to assure a financially independent exit.

Why then do fewer than 20% of owners have a written Exit Plan?

Statements from business owners themselves suggest that it is unrealistic to expect owners to act on their own initiative or even at the suggestion of an advisor. For any number of reasons, most business owners push Exit Planning to an unset, later date. But some owners do act. Why? For insight, let’s look at the situation of Michael Smith (a pseudonym for a representative owner).

Inaction: A Common Reaction to Solid Advice

Michael Smith owned a successful environmental remediation company. At age 62, he knew he needed to do something to prepare for his business exit. He first met with his financial planner, who referred him to an Exit Planning Advisor.

During their first meeting, the Exit Planner did two things: First, he summarized the Exit Planning Process using examples from prior Exit Planning engagements. Second, he described the relationship between transferable value and Michael’s role in the business. The Exit Planner then asked Michael which role he played in his company’s major decision-making actions.

“Just about everything that matters goes through me,” Michael said proudly.

The Exit Planner knew that Michael’s role in his business would need to change if it were to have transferable value, and he shared his thoughts with Michael. Michael knew that he needed to do something to make sure that his company would still be valuable without him, and he even told the Exit Planner that he agreed with him. But after he left the meeting, he did nothing, despite the Exit Planners comprehensive description of the importance of transferable value, despite how Exit Planning could increase transferable value, and despite all of Exit Planning’s benefits.

This passive refusal to act by savvy, decisive business owners seems paradoxical. Why don’t these smart people do what is in their best interests?

“I believe that my exit from my business will most likely occur as a result of planning and action items that I implement.” —80% of respondents to The BEI 2016 Business Owner Survey

In our experience, business owners feel comfortable being business owners. They enjoy what they do, but rationally, they know they need to change their roles in the business eventually. But most owners don’t resist planning their exits on a rational basis. They resist Exit Planning at an emotional level.

This emotional resistance manifests not as outright rejection of the Exit Planner’s suggestions, but rather as passive inaction. Business owners know that Exit Planning is necessary, but emotionally, they are not prepared to take that plunge. So, they ignore the problem until they’re ready emotionally, and by then, it’s often too late to create a plan that helps them exit their businesses on their terms.

How can business owners and advisors confront and overcome emotional roadblocks, especially when most owners and advisors would consider themselves experts in rationality?

Understand That Rationality Only Goes So Far

As professionals, business owners and advisors are trained to be logical, accurate, and rational. When the Exit Planner met with Michael, he used logic to explain what Michael needed to do if he wanted to exit his business on his terms. Michael agreed, because he understood her argument and what he needed to do, but he did nothing. Michael knew he had to do something, but he didn’t feel he had to do it now.

Whether you’re a business owner or advisor, you might read that last sentence and think, “That sounds like laziness or irresponsibility to me.” I can assure you—based on our own experience and countless stories from other owners and advisors—that rarely are such situations the result of laziness or irresponsibility. Instead, they’re the result of neglecting the important but sometimes hard-to-wrangle concept that exiting a business is an emotional event that requires an emotional response from both business owners and advisors. Acme has found a way to address these issues without requiring a doctorate in psychology.

Understand That Speaking to Emotion Is Necessary and Valid

In their book, Switch: How to Change Things When Change Is Hard, Chip and Dan Heath noted, “. . .the core of the matter is always about changing the behavior of people, and behavior change happens in highly successful situations mostly by speaking to people’s feelings.”

It’s common for business owners to disregard emotion when making business-exit decisions, because most of us are either uncomfortable or unversed in handling the emotional aspects of a business decision. Yet, in talking with owners about their business exits, it is important to realize that, for owners, this is not a simple, logical business decision. It is one of the most emotional decisions business owners will make in their lives, on top of being one of the most important financial decisions that they will make. That’s why speaking to emotion is not only valid but also necessary for a successful business exit. But how can we do that?

Speaking to Emotion in a Business Context

Let’s give the Exit Planner a second chance and assume he understood the need to focus first on emotions over rational explanations. How would that meeting go?

First, rather than try to convince Michael of the need to change, we asked Michael to complete a short assessment provided by Acme that identified his exit goals and objectives, and pinpointed the specific areas of his business that he felt needed improvement.

For example, Michael answered “No” to the following prompt about his management team:

  • Statement: Buyers look for and pay well for companies with motivated and long-standing key employees. Unless key employees are able to run the business without the owner, the company is neither sustainable nor salable to a buyer, employees, or the owner’s children.
  • Question: Can your management team run your company in your absence?

Asking owners to assess their businesses appeals directly to both their rational mind and their emotions. In completing this short assessment, Michael concluded that his business would collapse without him at the helm.

“This business would not exist without me,” Michael said. “I can never leave.”

“And is that OK with you?” the Exit Planner asked.

The consequences of his continued inaction stared Michael in the face, and he felt it in his bones.

“No,” he replied. “But what can I do?”

Exit Planning is both a process to exit your business and a means of moving the business forward. He explained to Michael how Exit Planning could help him create transferable value that would allow him to reach his personal financial goals and ensure the business would continue to flourish without him. The idea of progress appealed to Michael.

With Michael on board, it was then explained that Exit Planning and value building would take some time. Fortunately, during that transition period, Michael could change his role and focus his efforts on areas of the business that would most benefit him and his company. Acme showed Michael that Exit Planning did not mean exiting before he was ready, either financially or emotionally. Working toward an exit on his terms also appealed to Michael.

Once Michael understood that every Exit Planning action would be based on his goals, aspirations, and concerns—both financial and personal—he was willing to trust the process and Acme.

In explaining the benefits of Exit Planning to business owners, appealing to both their minds and hearts is essential. That idea is at the core of The BEI Seven Step Exit Planning Process.

Whether you’re a business owner looking for an advisor who can speak to both the rational and emotional concerns you have about your business exit, or you’re an professional services advisor (attorney, CPA or Financial Planner) who wants to connect with an Exit Planning expert who can help your clients navigate the rational and emotional roadblocks inherent to a business exit, we encourage you to contact us or call 270-883-2640.