Practically no entrepreneur wants to face the fact that at some point their business will cease to exist. They certainly don’t want to start the business planning for the eventuality. However, it is an important aspect to consider and for the well-prepared businessperson, a necessary part of a business plan. Yet in many western countries, entrepreneurs have overwhelmingly ignored this aspect of business.
The Problem
The numbers of savvy businesspeople without an exit strategy for their business is astounding. Only 35% of UK business owners have one. 44% of Canadian business owners have one, even though 92% of them believe in the idea of having one. Of American business owners only 80% have even considered leaving the business, but only a fraction of those have a plan for it. 96% of professionals who have their own practices based around their skills, like doctors, veterinarians and dentists, have problems leaving their business when they want to because of poor planning.
Many people who own a business have the illusion that the business will take care of them when they leave it. Many also believe that Social Security will be available to help them. Neither is likely to happen. Most businesses do not pay those who don’t work there and Social Security does not have money set aside for you. By failing to prepare for the end of your business, you will likely have a less than ideal experience when the time comes to get out of it.
The Reality
Whether we are willing to face it or not, we will stop working. It may be because of death, in which case the surviving loved ones and any business partners will deal with the repercussions. It may be that you cannot work due to disability, in which case your bills will be high and often little to no income will be generated from the business. If you are a business owner who divorces, your business or your role in it may be a casualty of the divorce process. Finally, you may simply decide to leave because of a better opportunity or because you want a change.
The Solution
The most common aspect of the end of a business that people actually do address is the possibility of death, and they do so by taking out life insurance policies that cover buy/sell issues. However, in order to create the most beneficial situation for both the business and the individual business owners, it is necessary to have a more extensive buy/sell agreement that deals with disability, divorce and voluntary leaving.
Disability, in reality, is more commonly the reason to exit a business than death. Having disability insurance or another strategy will help to take care of you and your family so the business can focus on carrying on without you and can pay a replacement.
In the case of business partnerships, the end of a business or the exit of one partner should always be preplanned from the beginning. This will avoid hurt feelings, misunderstandings and more. It is vitally important to have a lawyer create a business partnership agreement at the very beginning of the business to cover all these things.
Creating a successful business that will put you at ease financially is the dream of many. To do so requires thought and planning for all the positives, as well as the negatives. Planning for the end of the business or the end of your involvement with it is in the best interest of your finances and in the best interest of the business.
