Exit Planning is a Path to Diversification of Wealth


Most owners of privately-held businesses have the majority of their wealth trapped in their illiquid business.  What this means is that without a path to turn the value in your business into cash, your overall wealth will continue to stay concentrated in your ownership of your business.  So the fact that your business provides for a solid income and lifestyle is separate and distinct from considering how and when you will be able to turn that illiquid wealth into cash.  This newsletter is written to help owners see that a business exit plan can be a vital first step towards diversifying your overall portfolio while also protecting the wealth that resides in your illiquid, privately-held business.

The Basics of Diversification

There is an old saying that applies to many business owners – that “in order to get rich, you need to own a lot of one thing, but in order to stay rich you need to own lots of different things.”  Many business owners today ‘got rich’ through the ownership of their privately-held business.  However, in order to stay rich, many owners will need to diversify their personal wealth through the transfer of ownership of their companies.

If you are like most business owners, your business comprises the majority of your wealth.  Also, like most owners, your business is likely highly dependent upon you.  Therefore, if you want to protect your overall wealth through the process of diversification, you can consider planning for the eventual transition of your business, whereby a point in time will come for you to turn your illiquid wealth into cash.

Why Plan to Sell Something So Valuable?

Many owners understand the logic of diversifying their wealth through an eventual exit but they do not take immediate actions because they have a very good thing going with the success of their company.  For owners who agree with the logic of diversification but perhaps have not taken any action in this direction, we offer another question to ask yourself:

  • “If I sold my business today [for a reasonable price] would I turn around and invest all of those proceeds back into the same business or into a single stock that does not have an actively traded market?

The answer for most owners to both questions is a resounding ‘no’.  Not only would most owners not turn around and repurchase the business that they just sold but they would also not be looking to reinvest in a concentrated, single asset for the same sale proceeds.  The obvious reason for not repurchasing your business or to re-concentrate your wealth is because the RISK of only owning one stock – after achieving liquidity – is too high.  There is a single point of failure with that financial plan because the investment dollars are not DIVERSIFIED.

This is the financial reality of many owners of privately-held businesses today.

Why Most Owners Do Not Begin the Process of Diversification with a Plan

An exit plan is a written document that assists an owner with consideration of different ways to diversify their wealth by eventually becoming liquid from a transfer of ownership.  Given that the sale of a business is the largest and most emotional transaction for most owners, it makes sense that a plan would come before an action that is taken.  However, we find that most owners do not take action to plan for their diversification for a variety of reasons.  Many business owners offer a number of reasons, listed below, for their lack of planning, including:

  1. “I don’t perceive my business to be a RISK” or
  2. “I am not ready to SELL the business so I cannot DIVERSIFY, or
  3. “I bought plenty of life insurance to take care of my family if something should happen to me (in other words, ‘my demise is the only RISK that I really perceive to exist regarding the future profitability of my business’) or
  4. “I am DIVERSIFIED. My business sells many lines of products and/or services”

In each instance we see that the owner’s ‘plan’ is quite limited and does not actually diversify the owner’s family’s wealth.  Perhaps somewhere in this list of common responses you see one that fits your reaction to this question of planning for diversification?

The Psychology of ‘Selling’

If there is so much logic behind diversifying wealth through an exit plan, then why don’t more owners do it?  One answer lies in the psychology of an exit.

As an owner of your business you are the master of your own destiny.  You have survived the odds against ‘making it’ in business and continue to fight them each and every day.  For the most part, thinking about an exit strategy plan cuts against the grain of thoughts of business growth and expansion.

So, given this gap between logic and action, how do you begin to turn this bridge, this divide and start developing an exit strategy plan that protects all of the wealth that you have accumulated?

Seeking Help is the First Step in this Planning Process

The most successful owners know that they do not climb a mountain all by themselves.  Rather they surround themselves with a team that knows more than they do about areas that they are venturing into.

The same process holds true for planning for a business exit.  We advise that you seek out professionals with experience in this area to help you begin the planning process that ultimately leads to the protection of your illiquid wealth.

Concluding Thoughts

In closing, most business owners will make up their minds to do something when they are good and ready to do so.  Therefore, we can only continue to impress upon the millions of business owners out there that diversification is a key component to securing the success that you have worked a lifetime to achieve.  In this regard, one can say that it is never too soon to begin thinking about an exit plan, but without a plan, it could one day be too late.  We hope that this newsletter has assisted you in thinking about your overall wealth and how an exit plan can begin the process of helping you protect it.

Pinnacle Equity Solutions © 2016

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As You Exit, Who Will Do Your Job


As the owner of a privately-held business, you are likely a catalyst for the ongoing running and growth of the business.  The roles that most owners fill in their companies often span a number of different areas within the business.  Even with an established management team, owners are often still the ‘straw that stirs the drink’ on a daily basis.  Without the stirring where would your business be?  And, as you consider your exit from your business, you need to answer two questions on this topic.  First, ‘how dependent is my company on me’, and next, ‘who will do my job when I leave?’

What is Your Job at Your Company?

In your business are you the sales person or are you the head of operations?  Or are you both?  Do you innovate within your product line or do you watch over the finances on a regular basis?  Or do you do some of both?  Are you the leader amongst the staff or are you the owner who stays in their office in order to empower others to do their jobs without micro-managing them?  Overall, how much of your company is dependent upon you and who will fill those roles after you exit from the company?  Again, these are critical questions to answer if you want to have a smooth transition of the business and achieve the highest value with the fewest continued obligations from you during a ‘neat and orderly transition’.

Are You a Bottleneck for Your Business and Your Exit?

An important question to ask about the job(s) that you perform at your company is whether or not you actually slow down the growth of your business.  In other words, are you a bottleneck to your company?

You likely are a bottleneck to your company and your successful exit if any / all of the following apply to you:

  • You are critically involved with decisions on a daily basis, to the point where projects or steps in a procedure cannot advance without you.
  • You are the only person who holds key vendor and customer relationships and the only person who takes those phone calls and /or meetings.
  • Product design and innovation only comes from you.
  • You are the only person who knows the company’s financial position and has bank relationships to fund the business.
  • The strategic direction of the business is primarily set and understood by you.
  • Employees are generally disempowered to make decisions without your input and/or final approval.

The Challenges to Overcome

Owners typically resist changes to how they work in their businesses for a variety of reasons.  Some simply don’t want to make any changes after years of getting things the way that they want them.  Other owners want to make the changes but don’t want to do the work or do not know where to begin.  While others do not want to spend the money on new hires to do the jobs that these owners should not be doing.  Further some owners simply do not trust other people with these critical functions.

Give serious consideration as to what is holding you back from making these changes and letting go of certain tasks that others could more easily complete.  One motivation to make these changes is that your pool of potential, future owners becomes more limited if you are a bottleneck to your business and do too many jobs.

The Exit Challenge to a Bottleneck

Overall, the only person who will be willing to own your business after you is someone who not only wants the exact job that you currently have but also is as qualified as you to do that job.  If you have not properly assigned and delegated critical responsibilities, then it stands to reason that in most cases, the only person who can do your job after you is someone with the experience to do so as well as the financial backing to purchase your company.  All things being equal, this person, if they exist, is likely running their own business today.

Exit and Other Benefits of a Low Dependence

When you can reduce your owner dependence by distributing these responsibilities to others, you are in a stronger position to execute on an exit plan that liberates you from your business.  What is also interesting about going through this exercise is that your business will likely actually run better once you begin to take a step back and empower capable people to do certain tasks without you.

We hope that this perspective will assist you in achieving a more successful exit as you further define your job and discover who can replace you at your company after you exit, along the way reducing the dependence that your business has on your individual efforts.

Pinnacle Equity Solutions © 2016

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