By: Patrick Ungashick
This article is the first installment of a seven-part series on what business owners need to do once they reach the Last Five Years before exit.
Imagine a doctor has just advised a patient that he must lose twenty pounds – or his life is in danger. If the doctor said the weight loss must happen within one week, that would be a crisis. If the doctor said the patient must lose the weight within one year, it would take some work, but losing twenty pounds in one year would likely not be a crisis for most people.
In that situation, the key issue is time. The amount of time available to lose the weight determines if it’s a crisis, or a reasonable objective. This means that somewhere between one week and one year is a tipping point, where insufficient time creates a crisis, but sufficient time allows for an achievable goal.
The same is true for planning one’s exit. If a business owner for some reason decided he or she wanted to exit but only had one week to get the job done, that would be a crisis. What if that same business owner allocated not one week but rather one decade to plan for exit? Most people would agree that one decade would be sufficient time to achieve a successful exit. So, between one week and one decade, there is a tipping point. How much time is enough to plan one’s exit properly? Is one year sufficient? How about two years? Three? Five? More than five years?
In our experience, that tipping point occurs at five years prior to exit. Meaning, owners who start seriously planning their exit less than five years before the desired date often find themselves without sufficient time to accomplish all of their exit goals, and/or experience greatly increased cost, risk, and stress. Conversely, owners who start their exit planning five years or more prior to exit are more likely to achieve their goals, at lower cost and with less risk and stress.
Why is five years the tipping point?
Listed below are steps that many businesses and their owners need to take to prepare the company and/or themselves for exit. You will note that most of these items can take several years to accomplish—and that’s only if you get it right the first time. For example, if you need to upgrade your leadership team as part of getting the company ready for sale, one wrong hire can easily set you back a year or longer. Review the list below, and you may recognize a project that you might need to get done to prepare for exit, while you're still leading and growing your business.
All of the following can take up to five years to accomplish:
▢ Identify, hire, onboard, and align a winning leadership team
▢ Reduce owner dependency down to tolerable levels
▢ Achieve compelling performance against multi-year growth plans
▢ Achieve a multi-year run of strong financial results
▢ Outgrow any customer/client concentration
▢ Build a valuable brand protected in a defensible IP portfolio
▢ Time market conditions to your advantage
▢ Evaluate and implement tax-saving strategies
▢ Realize an ROI on employee incentive plans
▢ Address any co-owner exit misalignment
▢ Design and implement ownership and leadership transfer plans (if exiting to key employees or family)
Any one of these projects can take dozens to perhaps hundreds of hours to fully execute. Yet you and your leadership team still need to keep growing your company, because one of the worst things that can happen is your business fails to grow in the final years before you exit.
So, if you're saying to yourself that you have about five years before you want to exit – you have reached a tipping point. Every day from here gives you less time to achieve your exit goals. Today is the time to get started to avoid that crisis.