3 Small-Business Exit Strategy Mistakes Business Owners Make

A female executive walks out of the office with a box of her belongings while co-workers wave goodbye behind her.

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If you’re a small-business owner approaching retirement, it’s important to start thinking about how to avoid common small-business exit strategy mistakes.

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As a business owner, you’re no stranger to hard work. Throughout your entire career, you have worn many different hats, coordinated numerous projects and, ultimately, created a career to be proud of.

Owning a small business is challenging, and as your career has progressed over the years, you may be starting to ask yourself, “How long can I keep this up?”

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The reality is that many entrepreneurs are excellent at their craft, but haven’t always had the same skills when it comes to their finances.

Perhaps preparing an exit strategy from your small business has taken a back seat to growing your skills and profits over the years. But as retirement creeps up on the horizon, it’s important to have an exit strategy in place so your business can continue long after you have left.

If creating a retirement and exit strategy seems overwhelming or complicated to you … cut yourself some slack. Remember, you’ve spent most of your life building your business, not as a financial guru. Let’s walk through a few of the most common mistakes small-business owners make when planning their exit strategy and how to fix them.

Mistake #1: Starting Your Planning Too Late

Planning your exit strategy starts long before you retire. There are many steps you can take from Day 1 to get your business to a place that allows you to leave with a sense of peace and also maximizes what your company is worth (i.e., enterprise value).

Invest in culture. Ensure every hire has the same values and work ethic as you during the interview process. You can show good employees your appreciation through generous training, pay and benefits. Knowing you have good people to handle things when you’re gone makes it easier to leave, both logistically and emotionally. A healthy culture and employee base are also appealing to potential buyers!
Optimize processes. The operational aspects of your business need to be well organized and easily explained to somebody new. Just because your systems make sense to you, doesn’t mean they will to the new owner. Streamline your operations so the value of your business is transparent to potential buyers. It shouldn’t take you years to get out of your business because you’re finally being forced to organize those files you ignored for the last two decades.
Build revenue. Do you generate enough revenue each month to adequately save for retirement with your profits? Build your revenue stream by expanding products/services or increasing the markets in which you do business. You need more revenue than just what pays the bills. Buyers also want to see you have a diversified revenue stream, not one that is dependent on a single client or market.

The more you can grow your revenues, optimize processes and build culture from the beginning, the easier it will be for you to get out of business when the time comes. You won’t have to “clean up” after yourself, and it will be easy for buyers to see the amazing value you’ve created!

Mistake #2: Not Having a Successor to Run Your Company

If you thought selling your company was the only way to exit the business and retire, you would be wrong. There’s more than one option when it comes to figuring out how your business can continue after you decide to step away.

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One of those options may be an arrangement where the day-to-day functions are now overseen and handled by someone else, such as a trusted business partner or family member.

It’s not uncommon for small-business owners to have family members be a part of their exit strategy. In many ways, this can be a wonderful way to create a family legacy.

It may even ease your transition if you are concerned about how you’ll adjust to retirement. By passing the business to a family member, you can decrease your workload over time as your family member takes over and the business becomes more self-sufficient.

If this is part of your plan, you should make it clear well before you expect to retire. The time it takes to train and coordinate with your successor is often greater than you anticipate. Additionally, unforeseen challenges may arise that you’ll need time to work through.

You shouldn’t expect this strategy to be in place overnight.

Mistake #3: Making Yourself Irreplaceable

It’s easy to do and maybe even a little rewarding at times. But the more irreplaceable you are, the harder it will be for you to retire.

While it’s great to be specialized and have expertise that makes you a go-to individual when running your business, it is a surefire way to make your company flounder once you leave.

By building a business model around yourself as the central component, you’re probably delaying your exit. It’s not your goal to have your company instantly collapse once you retire, so make sure you’re empowering others to take your place as often as you can.

What does this look like? Here are three examples:

More mentor, less boss. Allow your employees to work their way through certain issues and resist the urge to step in and handle them yourself, even when you know you could have it done sooner and more accurately.
Memorialize policies. Start creating documents that reference your policies and procedures. This could be as simple as creating a few worksheets or checklists your crews can use. Or it could be a full-blown SOP that explains every minute detail of running the business.
Delegate. If you’ve already thought about the day you’ll retire, then you know there will come a time when your current staff has to take the workload. Start delegating more tasks that are appropriate so your team can gain experience and receive guidance before you leave.

As your retirement gets closer and you start to plan your exit strategy, remember that being replaceable is not a weakness. It usually means you’ve developed a strong team.

For a small-business owner, that’s the whole point.

Retirement decisions give you a lot to consider. It’s not unusual to be nervous or worried, and you will likely have questions about whether or not you’re ready.

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The good news is that you’re not the first person to feel this way, and other small-business owners work through the same difficulties when thinking about their exit strategies. Just be sure to prepare ahead of time so you feel more comfortable as retirement approaches!

Content in this material is for general information only and is not intended to provide specific advice or recommendations for any individual.

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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Chris Giambrone is a co-founder of CG Capital™, a boutique wealth management firm based in New Hartford, N.Y. He is a CERTIFIED FINANCIAL PLANNER™ and Accredited Investment Fiduciary® (AIF®). Chris has also earned a Certificate in Retirement Planning from the Wharton School of Finance at the University of Pennsylvania.