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The Two Most Damaging Assumptions Business Owners Make About Their Assets

Business owners sometimes become cagey when their advisors ask them whether they’ve started preparing for their inevitable exits from their businesses. That’s because most business owners have not begun preparing at all. According to BEI’s most recent business owner survey, only 17% of owners have a written Exit Plan. Why aren’t owners more vigorously preparing for the biggest financial event of their business lives? Some of their answers may surprise you.

  • 26% believe they can leave at any time, no preparation necessary.
  • 27% believe their companies don’t have enough value for them to leave.
  • 37% believe that they can wait until they are ready to exit to start planning.

These numbers tell us a couple of things. First, 73% of owners don’t know for sure whether their businesses are worth enough to allow them to exit. That’s a huge portion of the business-owning population that could be operating under false pretenses, unless their advisors can help them.

Second, these numbers and the experiences of many Exit Planning Advisors imply that when talking to owners about their exits, advisors must help owners dispel two damaging assumptions:

  1. The resources owners have accrued are enough to allow them to leave whenever they want.
  2. Owners can accumulate enough financial resources between the time they decide to exit and the time they complete their exit to support their post-exit lifestyles.

These common assumptions run head on into several facts about Exit Planning.

First, for most owners, the most important financial event of their lives is the transition out of their businesses. Second, most owners don’t have an actionable plan for the most important financial event of their lives (at least not right now). Third, the primary job of Exit Planning Advisors is to help owners plan for and execute this event. Fourth, and perhaps most importantly, the most pressing problem advisors face is overcoming the misperceptions that make owners believe that they don’t need to start planning for their eventual exits.

How can advisors help owners resist these misperceptions? Why should business owners reconsider their preconceived notions about their business exits?

Addressing the ‘I’ve Got Enough to Leave Anytime I Choose’ Misperception

The false belief heard most often from owners is a variation of “I don’t need to get involved with Exit Planning because between my personal investments and business value, I’ve got enough socked away.”

Most often, this simply isn’t true.

Business owners seldom have an accurate understanding of the value of their existing assets, much less the amount of assets they’ll need to continue living the way they wish after they exit their companies. Because owners don’t know where they are or where they need to be in terms of their assets, they can’t possibly appreciate the size of any gap between the two. That’s a huge problem because successful exits depend on bridging that gap, and building that bridge takes time.

The most effective way that Exit Planning Advisors address this urgency with business owners is by asking owners to tell them what they know about their resources. Questions like:

  • What is your business worth, and how do you know?
  • How much income will you need per year to live the lifestyle you desire?
  • What is the likely return on your investment portfolio after you exit your company?

When advisors can confirm for owners that they have sufficient assets to exit on their terms, they provide a benefit. Even better, when advisors show owners that their assets will not support the post-exit lifestyles they desire and then show them the size of the Asset Gap they need to bridge, they do a great service for business owners. By gathering and presenting accurate information about their resources, advisors help owners use the time before they exit to create the lives they want after they exit.

If advisors are not attuned to how owners think, do not understand the common misperceptions they embrace, and do not know how to combat their misperceptions, it’s unlikely that the owners they represent will act. And if owners do act based on incorrect assumptions, they will discover, too late, that they have exited without financial security.

Causes of Owner Misperceptions

To better understand how to help owners overcome misperceptions, advisors must understand why owners hold those misperceptions. Owners make the mistake of thinking that they don’t need to plan their exits for a lot of reasons, but the most common include:

  • They underestimate the amount of income they’ll need after they exit.
  • They overestimate the value of their businesses.
  • They underestimate how long they will live after they exit.
  • They underestimate (often substantially) the taxes and expenses they’ll incur in the transfer/sale of their companies.
  • They project an unsustainably high withdrawal rate from investment assets post-exit.
  • They are convinced they can grow business value faster than their historical growth rates would indicate. The corollary is that they underestimate the amount of time they need to grow value, cash flow, and income-producing assets.

The net effect of these miscalculations is that owners don’t see the need to devote time, effort, and money to Exit Planning. Based on their assumptions, owners figure that they have adequate resources to leave their businesses whenever they want. These assumptions lead owners to mistakenly think that they don’t need to start Exit Planning until they are ready to exit.

To counter these faulty assumptions, Acme Advisors and Brokers brings in experts to replace their clients’ estimates and assumptions with facts about their specific situations. These experts, who are members of our team, give owners the foundation upon which they can build their Exit Plans. This strong foundation allows owners to work toward their eventual exits on their terms while improving how the business functions as they run it.

  • Misperceptions typically cause owners to (a) underestimate the amount of capital they’ll need to achieve their needed post-exit income and (b) overestimate the amount of capital they’ll have available to them at their exits.
  • Unless they have a formal valuation in hand, business owners are usually inaccurate in determining the value of their businesses. Likewise, owners are usually inaccurate in estimating the assets they have versus the assets they need for a business exit on their terms. Unless advisors help owners dispel these inaccuracies, their business-owning clients will likely float along, doing nothing to prepare their businesses for a successful transition.
  • Owners underestimate the amount of time they need to grow business value, cash flow, and income-producing assets. Advisors must help them properly manage their time by asking effective questions about where they are financially, where they must be financially, and where they want to be financially.

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John Brown, CEO of BEI and Author of Exit Planning: The Definitive Guide