Business Owners are Picking Up, Dusting Off and Moving On

Business owners today are beginning to emerge from the bunkers that they have built around themselves and are looking ahead, once again, to what the future has in store.

There is a general feeling that we have suffered the worst of this storm. Moreover, since even Warren Buffett agreed that this economic maelstrom is 'the worst case scenario' that was envisioned, perhaps it is also true that any more suffering would merely be incidental to what has already been felt . . . could this be the tell-tale signs of a bottom?

I don't want to be the fool who says that this market cannot go any lower or that the economy cannot get any worse. I have been studying markets and investor/human psychology for far too long to make such a bold claim. But I can make a not so bold prediction that more and more business owners will awaken to the idea that the equity that is trapped in their illiquid businesses is now more important than ever and they will be looking for ways to monetize it in order to meet their personal goals.

Let's face it, the retirement that any business owner contemplated one or two years ago is likely a plan that is residing in the circular file in their office (in case the pun escaped you . . . that is the garbage pail). The security that they thought that they had in their investment accounts is now significantly lower and these owners need to focus on their businesses and the equity in that business once again.

The owner's financial advisor did not create this problem. In fact, even Warren Buffett - the world's greatest investor - was saying last October that it was a good time to purchasing stocks. Simply put, life created this event. This is not a once-in-a-lifetime, but a once-in-three-lifetimes type of event. As advisors and as business owners we have to take this event and learn from it. We need to see what lesson is buried within this calamity. Then we need to use this wisdom and higher understanding to our benefit. We need to convert these unfortunate events into opportunity. We need to be pro-active in our approach, recognizing that others will not be.

Let's talk about the illiquid equity that is sitting in a business owner's business. This is the value of the enterprise, beyond the 'book value' - or the value of the tangible assets (inventory, machinery, real estate, etc . . . ) - that exists within a business. This is not cash flow, which can be extracted from the business. It is the 'going concern' value, the value of the enterprise to produce future profits. Now, an owner cannot pay for his retirement today with earnings to be received in the future, unless he can find someone willing to share in the risk of those profits actually arriving. This is what a business owner accomplishes when they sell their business. They sell to someone willing to assume the risk of the business and pay the owner/seller today for profits to be earned in the future.

Because of the economy and the contraction of credit, there are not a lot of 'buyers' out there today. So, many owners feel as though they do not need to plan for their exit. This is a natural reaction . . . why try to sell something to a marketplace that is not interested in purchasing. But, the critical piece that is missing from this equation is that every decision that the business owner makes from today until the day that they exit their business will impact their exit value.

So, planning for an exit is more than simply taking action when the market is 'hot'. It is just the opposite. A successful exit strategy is one that utilizes these down markets to prepare the business for an exit when the 'window' opens again. And, let's not forget, that selling the business is not the only exit option - again, far from it. However, any exit option needs to consider the underlying viability of the company's sustainability in order for the overall exit structure to be a success. Now is the time to address this sustainability.

More and more business owners are coming to this realization now that they see that there may only be one more exit window prior to them turning 70. In addition, most of these owners do not want to miss the next window in fear of falling into another recession such as the one that we are currently experiencing. These owners need to begin the planning today and it is our job as advisors to assist in raising their awareness to this reality.

Today's marketplace has left quite a bit of debris in its wake. The owner who can dust themselves off, pick themselves up, and move on with their lives will be ready to have the conversation about planning for their exit. There is a pent-up demand that is building for this exit strategy planning advice and it is the wise advisor who invests their time learning about how to have this conversation and how to monetize the concept to grow their practice.

© John M. Leonetti