Whether it arrives after a few years of intense work or decades of dedication, there comes a time when every business owner must consider an exit strategy. While much goes into crafting a specific plan, the feasibility of an exit is largely based on two foundational aspects: mental and financial readiness.

Understanding Mental Readiness

While financial readiness is certainly important, mental readiness must be discussed first. That’s because a lack of mental preparation for the future can be unhealthy and dangerous on multiple fronts. However, if the proper groundwork is laid, you can rest easy at night.

Mental readiness simply deals with what your future will be like after selling your business. This includes how your exit will affect your desire for control, emotional stability, family relations, and future plans. Whether you realize it or not, your exit will have an effect on a number of different areas of your life, including:

• Financial future. Your exit will have a financial effect on your future. While this will be discussed in further detail as it pertains to financial readiness, it’s important to understand that financial security is often directly correlated to mental stability.
• Family relationships. Your exit can affect family relationships as well. Being prepared for life after ownership should be considered on this very intimate level.
• Future plans. The sale of your business should allow you to relax and pursue other ventures, hobbies, or plans in the future. It’s important to determine how comfortable you are with relinquishing control.

How to Determine Mental Readiness

Determining your level of mental readiness is no exact science. However, there are plenty of tools to help you along the way. Let’s take a look at three questions you need answers to:

Are you ready to relinquish control? It can sound like an easy question, but it’s loaded with individual considerations. Depending on the type of personality you have and how much you desire control and influence, an exit may be more difficult than you anticipate. Signs you are ready to relinquish control include presently delegating the majority of your responsibilities, becoming increasingly trustful of your employees, feeling less equipped to handle tasks, and losing interest in things you once found fulfilling.

How will your exit affect your family? This is a tricky question to answer; it involves a number of different angles and is arguably the most important area of mental readiness. The best way to determine how it will affect family members and loved ones is to have frank discussions with everyone involved. If you have a spouse, are you both on the same page? If you have family members working in the business, do they understand how the change will affect them? Finding answers to these questions – and many more – will better prepare you to exit.

Do you have a plan for life after your exit? Many people wrongly assume their life will just fall into place after an exit. Depending on your personality and situation, it could. However, more likely than not, you will have to develop some sort of plan for your future. What will you do with your free time? Filling your free time may mean picking up hobbies, pursuing another business opportunity, or spending more time with family – just make sure there is something waiting for you.

Understanding Financial Readiness

Where mental readiness is rarely considered, financial readiness is usually the focus. Despite this, many individuals exiting a business don’t approach it in the correct manner. Instead of weighing all the factors and thinking about the true costs and benefits, they simply look at a single financial figure or statement.

Unfortunately, financial readiness depends on more than just a dollar sign. You must determine how your exit will financially affect the business, your wallet, and your family’s financial future and security. Some of the questions you will need to consider include:

Do you understand the financial cost of selling your business? If you don’t have any experience selling a business, you may not understand all the costs that go into such an important transaction. The sale will incur commissions, taxes, transfer fees, and more. Make sure you calculate these into your valuations. When the final dotted line is signed, will you walk away with a figure you are comfortable with?

Will you be financially stable for the remainder of your life? If your exit is paving the way for retirement, it’s important to determine whether you will be financially stable for the remainder of your life. Consider the increasing cost of health care, the status of your portfolio, and how much you need to live comfortably.

Will you be able to support people you care for? Whether you are a parent or grandparent or have someone else who depends on you, you need to consider how your exit will affect the financial stability of dependents. Do you have goals of paying for college tuition? Do you need to cover assisted living expenses for a parent? Don’t forget these important considerations.

Look for Signs of Readiness

According to a recent BERI report from Pinnacle, people aren’t as ready for their exit as they think. While many individuals considering an exit have their finances under control, it’s the mental side of the equation that needs help. The results of the report suggest 84% of business owners are not mentally ready. The following attributes indicate low mental readiness:

• No tangible plans for life after the exit.
• Taking less than three weeks of vacation time per year.
• Having had no discussions with employees about a possible exit.
• Still performing at the top of their game.
• Lacking replacement resources.
• Having a high level of enthusiasm about the job.

However, the opposite is true as well. When business owners have plans in place, are becoming increasingly discontent and less enthusiastic about the job, and have properly prepared the company for transition, an exit may be viable.

Take The Readiness Quiz

To help determine your level of mental and financial readiness, we’ve developed a strategic 20 question quiz. For more information on whether an exit is right for you, reach out to us today.