Losing value to the “four Ds"

The concept of “exit planning” is full of emotion and bias. Entrepreneurs and family business owners tend to view their enterprise as “their baby” and can’t the idea of abandoning it. The idea of exit planning is met with resistance because it threatens the owner's ego and sense of purpose. Baker Tilly empathizes with this response – deep emotion and psychology are in play. For many of our clients, the business is personal; it represents an identity, one’s mission or purpose, often times a family legacy.  What will I do with my life once the business is sold? Where will I find my inspiration and drive?  Am I doing right by my family if I sell? What does selling the business mean for the future? These are questions that often haunt or cloud business owners’ judgment, causing them to resist the idea of exit planning.

Despite an appreciation for the negative proclivities on the subject, we encourage a paradigm shift in thinking. Exit planning is a sound business strategy because the concepts revolve around preserving and enhancing the business’ value. This should resonate with business owners because in most instances, 80-90% of a business owner’s wealth is tied to their business. [1] Aversion to exit planning can threaten the business’ value, as well as the owner’s wealth and ability to achieve their long-term personal and financial goals.    

Consider some data: 79% of businesses anticipate some type of transitional ownership, however, 49% have no plan in place to do so.  Even fewer businesses actively strategize and nurture the drivers that preserve and enhance value. Three out of four businesses will change hands over the next 10 years. The question is whether this sale/change in ownership is on the business owner’s terms or if the business will fall victim to the “four Ds.”  The four Ds represent the common crisis that drive a forced sale and are as follows:

Divorce, death, disability and dispute

The four Ds are abrupt and untimely. When one or more of these occur, it often triggers sale or transition of ownership under stressful conditions responded to in haste. If the enterprise has not contemplated and prepared for an exit, they will be forced into a sales event with little to no direction, clarity, leverage or preparation. A transaction driven by one of the four Ds places the enterprise under duress because things are happening quickly and with emotion – certainly not ideal conditions when trying to ensure maximum value is achieved in the transaction. An enterprise that finds itself under these conditions is at a disadvantage. Evidence supports that a forced sale driven by one of the four Ds has a dramatic and negative impact on the value harvested by the estate, family and remaining business owners. [1]