Personal readiness - A neglected aspect of exit planning?

The deal was everything Karl Watkins thought he’d been striving for.

After 22 years building this business from a spare-room start-up into a £14 million specialist engineering group, CEO Karl Watkins was approached by a private-equity buyer with a cheque big enough to hit every target on his ‘exit spreadsheet’.

The legal documents were signed on a Friday; by Monday morning Karl's schedule was empty for the first time in two decades; six months later, he was back in the company car park at 7am, clutching a takeaway coffee and rehearsing a polite story about how he was “just dropping in”.

The truth? Karl missed the buzz and the authority of being the owner. He even missed the headaches. A tightly planned fitness regime had fizzled out, the charitable board roles he’d taken on felt hollow and he still hadn’t calculated how long the net proceeds of the sale would actually last once tax, advisers’ fees and a new lifestyle were factored in.

While a lucrative sale to a private equity buyer may sound like a dream for many business owners, Karl is far from alone in coming to regret what seemed like a straightforward decision at the time.

According to the Exit Planning Institute, 76 per cent of owners regret selling within 12 months of closing the deal. In other words, three out of four entrepreneurs achieve the financial headline they dreamed of - only to discover they never asked a more basic question: am I, personally, ready to step away?

This indicates that personal readiness is something that many owners don’t sufficiently grapple with during the sale process and may be something that they discount altogether – instead viewing a sale as purely a strategic or financial consideration.

Obviously, those aspects of a sale process matter (and are inextricably linked to the personal side of a sale), but if a sale process meets all of your financial and strategic aims, yet you are still unhappy afterwards – was it really worth it?

In this insight, we look at the risks that a lack of personal readiness can pose to the sale process itself and your life post-ownership, how personal readiness can be gauged and how to achieve it ahead of a sale.

Personal attachment can poison a business sale
We’ve spoken previously about how a business where the owner is too central to daily operations is virtually unsellable. What is perhaps less discussed is how an owner being too personally attached to their business can also have a significant negative impact on a sale.

Owners (especially founders) often view their companies as more than simply a business. To some, it’s their legacy in the world, to others it’s their life, or even an extension of themselves. It’s common for business owners to use familial language when discussing their companies, referring to the business as their child and employees as family.

While this kind of passion is not necessarily a bad thing, if left unchecked and not balanced with the ability to make decisions logically, it can lead to significant challenges in deciding what’s best for the business – especially regarding a sale process.

Fundamentally, if an owner who is too personally attached to their business decides that they should sell the company, then both the sale process and the owner’s life post-sale are extremely likely to be negatively impacted by a lack of emotional preparedness.

Emma Obanye founded BuddyBounce, a fan engagement platform that was subsequently acquired by music social app Crowdmix in 2011. Obanye initially felt optimistic about the sale, moving to Thailand with her partner, making new business plans and appearing to have made a successful transition ahead of an exciting new chapter.

However, she began to experience dreams about her former business (sometimes nightmares) and, following a move to Barcelona, things began to deteriorate further. Despite the financial security provided by her exit and living in a “lovely city, having a great life”, Emma began to experience severe depression. Some days she didn’t even get out of bed.

Emma explains that these feelings were rooted in a loss of identity, saying that, after six years building Buddybounce, “It was my baby - and then all of a sudden, it's gone. I was like, 'Who am I?'" This went on for three years, with Emma saying she isolated herself from friends during what she herself described as “a grieving process”.

Emma’s case is by no means unique and demonstrates the potentially severe consequences of a lack of emotional preparation. It also shows that owners may not even realise they are not emotionally prepared during the sale process itself and that the sense of loss may not even become apparent until months later.

An owner who is still overly-emotionally attached to their business is less likely to fully commit to the process of preparing the business for sale. This is an exhaustive, lengthy process (at least 3 - 5 years) that ensures the business is ready to transfer to a new owner and that its value is maximised pre-sale.

Failure to properly undertake this process could mean that interest in the business fails to materialise due to the difficulties buyers would face in assuming ownership and the fact that it hasn’t been scaled up or generated consistent growth.

Conversely, the business may attract buyers who put a far lower valuation on it than the owner might, owing to the above factors. This may have a severely negative impact on an owner’s post-sale plans, which are likely to be tied in to generating a particular figure through their business sale.

Circling back to the issue of owner centralisation, this is also a problem that is more likely with an owner who is too emotionally invested in the business. Business owners who are too attached to their company are less likely to cede control of key functions to other senior staff, potentially feeling that the business may be at risk in other hands.

This will result in a concentration of knowledge with the owner, a lack of key expertise and responsibility among senior staff and, almost invariably, an unmotivated and disengaged workforce. In shorthand, a business that most buyers would not look twice at.

In terms of the sale process itself, emotional attachment can compromise an owner’s ability to proceed logically. This can impact negotiations, putting the owner at risk of avoiding a good deal that would work well for the business, or of being taken advantage of by a savvy buyer who picks up on their emotional vulnerability.

If a sale is agreed, the transition process may also be hampered, with the owner potentially less able to effectively guide the business during the change of ownership, ensure that key knowledge is preserved and passed on and that the team is prepared for the transition. This could mean that the company’s culture and legacy (as well as the owner’s own legacy) is at risk should the business fail to successfully integrate post-acquisition.

Post-deal regret
Arguably an even worse outcome, and one that reportedly impacts the majority of business owners who exit their companies, is that the process goes through – maybe even delivering a high-value sale and successful transition to new ownership – and the owner realises afterwards that they weren’t ready and comes to regret their decision.

According to a 2018 report from the Exit Planning Institute, 76 per cent of owners who have sold their businesses say they profoundly regret doing so within just one year of the sale. This is an alarming statistic and should give any business owner (even one who is certain they wish to sell) pause to consider whether they are in fact personally ready.

There are a number of reasons why this should be the case. Primarily, as mentioned earlier, the owner may simply not have considered their business exit as a personal matter, instead seeing it as strategic and/or financial. While these are undoubtedly pivotal considerations, owners should be wary that there is invariably a personal element to something as involved, time-consuming and significant as business ownership.

Lorna Davidson was the founder of field sales and marketing firm Tactical Solutions Limited and had grown the company into a sizeable operation. In 2010, the company achieved turnover of £11.5 million, up from £7.7 million in 2009, and operating profits of £1.37 million, up from £614,166. The company worked with a significant number of the UK’s major household brands including Innocent, Heinz, Diageo, Burtons Biscuits and Cadbury’s.

At the time, the business employed around 380 full-time staff and 800 part-time employees. The company was clearly on an upward trajectory and attracted significant interest from a number of potential buyers, before ultimately being acquired by print group St Ives in 2011 in a deal worth over £13 million.

That night, Lorna celebrated at the pub with champagne, seemingly basking in the glow of an extremely successful, profitable sale. However, the post-sale regret was instant. She went home that night, walked through the front door and cried. She says she “was so inconsolable my family asked 'didn't they sign?'"

Despite achieving her financial and strategic objectives, she had neglected personal considerations. As she explains, she had "given lots of thought to getting the business to sell but I hadn't given enough thought to me."

While Lorna ultimately used her painful experience as a learning opportunity when she founded her next venture, Mothership Group, which is in the process of launching four new businesses, one of which is redwigwam, an online temporary work booking platform with over 85,000 workers registered. The companies in the group are all focussed around intelligent selling to make a noticeable change in the sector they work in, and a charity called The Mothership Foundation which helps provide investment funding for individuals who would not get any otherwise.

Lorna’s case also highlights the importance of placing personal considerations alongside business and strategic factors during a sale.

Ceding control to a co-owner
Owners who remain with their business but cede control to a new buyer, for instance a private equity firm, may feel this form of regret particularly acutely. A sale to a private equity buyer, from a purely-business perspective, can offer a business the investment it needs to supercharge its growth and achieve its potential.

While this is often the case, owners may sometimes overlook the fact that this comes with compromises. Post-sale, the buyer will expect to command significant control over the company’s strategic direction, something that an owner who has only worked collaboratively with a small, trusted leadership team may be unprepared for.

Furthermore, a buyer such as a private equity firm is also likely to make significant changes in the name of cost-cutting, efficiency and brand management. While this may result in the company becoming more efficient and successful, it can also lead to the company losing some of the identity it previously had. This can be a tough thing to take for staff who were at the company pre-sale and had grown familiar with its brand, identity and the way it operated. This is particularly true for an owner who had built the company up over many years.

Exiting fully
If an owner makes a full exit, then they may experience a loss of identity or purpose. It’s natural to feel melancholy when a longstanding routine or way of life ends (even if it is something as taxing as business ownership), but sometimes this can deepen into a sense of loss and a deep regret at leaving the company behind.

Owners who are emotionally attached to their companies can begin to feel like it is a part of their family, an extension of themselves or that leading the company is what gives them purpose in the world. Some may not realise this until after their sale (invariably leading to regret), while others may repress the feelings, viewing them as irrational compared to strategic or financial considerations.

In either case, failing to confront this attachment could be a significant mistake. Even if an owner makes a smooth, profitable exit, the feelings of regret and loss may lead them to wonder whether it was the right choice.

How to gauge personal readiness
Are you emotionally ready?
Emotional readiness is at the heart of the issue here. Exiting without being emotionally prepared is almost certain to lead to feelings of regret or a sense of loss once the sale process has completed and the reality of the exit has sunk in. If you are considering selling your business and are unsure whether you are emotionally ready, consider asking yourself a few simple questions.

Can you imagine your life or your identity without the business? If the answer is no, then it is time to confront your emotional attachment to the business and explore ways in which you can begin detaching yourself, prior to engaging in an exit process.

Are you excited about post-exit life or just burnt out and relieved to exit? It’s understandable that many owners decide they wish to exit due to feeling overworked and stressed out by their considerable responsibilities. However, once these feelings clear post-exit they may realise that they were in fact not emotionally ready to leave.

In such a scenario, it may simply be the case that you are too involved in the business on a day-to-day level. In which case, undertaking a process of owner decentralisation is a critical step. This will not only massively increase the business’ value and sale readiness should you decide to proceed, but also provide clarity over whether you are really ready to exit, or were simply overworked.

Are you emotionally prepared for a sale process? During a sale process, you essentially put your business on display for others to assess. This can be a difficult process for an owner, as third parties will begin forensically examining and ultimately placing a value on something that you have worked hard to build and which is a huge part of your life.

Speak to an exit planner or business advisor and gauge how comfortable you feel with someone providing an unemotional assessment of your business. If this is too difficult, then you are not ready to undertake a full sale process.

Emotional preparedness is perhaps the most difficult to quantify aspect of personal preparedness for a business exit, and the one most likely to lead to regret. If you are engaging in a sale process it is vital to make some attempt to gauge how emotionally ready you are and, whether you feel ready or not, to ensure you have a strong support system in place.

Financial preparedness
Of course, a lack of emotional readiness is not the only factor that can lead to post-sale regret. You may be perfectly emotionally ready to exit and then, once you’ve secured your sale, find you did not adequately financially prepare for what comes next.

Fundamentally, you should gain an idea of the kind of finances you’ll need in place to comfortably enjoy whatever you have planned for your post-exit life, whether that’s retirement, travel or a new business venture. Creating a financial plan will help you to gain an idea of the figure you’ll need, factoring in taxes, investments, estate planning and other lifestyle-related expenditures.

Engaging with a wealth advisor is crucial as they will help you in performing a capital sufficiency analysis, which will determine your financial security in a post-sale scenario.

Once you have this figure, you’ll need to assess whether the proceeds from any sale of your business in its current state will be sufficient. If not, then you will need to engage in a process of scaling your business up and building value prior to getting the sale underway.

If your business has a high value, then the kneejerk response may be to assume that this will be more than enough to ensure you are financially prepared for post-sale life. But failure to thoroughly account for the future by not drawing up a financial plan or performing a capital sufficiency analysis may mean that there is a nasty sting in the tail.

A post-exit plan
It stands to reason that having plans beyond business ownership is one of the key reasons to seek a business exit, but how well thought out are those plans? And, when the time comes, do you truly have something that you want to do more?

For many business owners, their post-exit plans may be extremely vague. For example, to travel more, to spend more time with family, to think about what comes next professionally or simply to relax after years of hard work.
Now, these are all legitimate things to do in the post-exit period, but neglecting to properly plan what comes next can lead to you rapidly feeling at a loss for what to do following the sale, potentially exacerbating feelings of a loss of purpose or identity or a sense of regret.

According to the Exit Planning Institute, personal planning is the most neglected aspect of exit planning, with the institute blaming high historical levels of post-sale regret (76 per cent of owners according to the EPI in 2018 and 75 per cent according to PwC research cited in the EPI’s 2023 study) on a lack of planning for what comes post-sale.

The 2023 report showed a highly positive trend in this regard, with post-sale planning seemingly having increased dramatically over the past decade (it is worth noting, however, that this report polls US business owners only).

In 2013, the EPI found that 96 per cent of owners polled had no formal plan for life after their business sale. By 2023, however, 41 per cent of respondents said that they had a formal plan in place, 50 per cent had thought through an informal plan and just 9 per cent said that they had no plan whatsoever. Our own experience suggests that the percentages are considerably lower in the UK, where the awareness of exit planning is a few years behind the US.

The high figures for both a lack of planning and of post-sale regret in previous studies suggests a correlation between the two, underscoring the importance of thinking hard about what you wish to do post-exit.

Firstly, consider what you – ideally – want to do with your time post-sale. It might help to consider big, overarching plans (e.g. travel, start a new business) first, before moving on to the daily, weekly and yearly rhythm of your post-sale life.

Once these things are in place, you can begin incorporating things such as timelines and goals into your post-sale plan. While there’s no pressure to rigidly stick to this plan, having some structure in place will help to avoid feelings of aimlessness or purposelessness. As always, talk these things through with family and other people within your support system, as they are likely to play a significant role in these plans.

If, when you think about what you would ideally like to do post-exit, there is nothing that you are truly passionate about, this could indicate that you are not truly ready to move away from the business, but maybe just away from the stress of your current role.

Exploring whether you need to make yourself less central to the everyday running of the business, or whether you wish to change roles (for example, passing ownership onto management or an employee ownership trust and taking up a consulting role), may help to reveal that you are not personally ready to leave yet.

Establish personal readiness, even if you aren’t planning an exit
Finally, a point that needs to be heavily emphasised is that business owners should seek to establish personal readiness even if they aren’t actively seeking to exit their company. This is due to the fact that many exits are either unplanned or forced.

The EPI asserts that 50 per cent of all exits are “forced”, i.e. they arise from what are known as the “5Ds”: death, disability, distress, disagreement or divorce. These exits occur unexpectedly and contrary to any structured, long-term exit plan an owner might have in place.

Of course, many of these factors may render emotional attachment to a business of minimal concern, but being left without any post-business plan for such a scenario could exacerbate the situation.

Similarly, in the case of an unplanned exit. In previous insights on preparing your business for sale, we’ve discussed the importance of building your business to a point where it is “always saleable”. That is to say that, while you may not be planning to sell, the business is ready to transfer to a new owner at a high value in the event of an unexpected offer.

Indeed, as off-market opportunities become more attractive to buyers, such exits are becoming increasingly common. According to 2023 research from Azets, up to half of business exits stem from an unexpected approach, or “tap on the shoulder”, from a buyer.

This underscores the importance of not neglecting your personal post-exit planning when preparing your business for a potential sale, even if you do not plan on undertaking a formal effort to sell the business for the foreseeable future.

Overall, the commonality of unexpected or forced exits shows that being overly emotionally attached to a business is an issue that any owner should confront and seek to address, whether they are eyeing the exit door or not.

To conclude – Align the three legs of the stool
The key point when it comes to being personally ready to exit a business is that this is not an isolated consideration that can wait till after a sale has completed, nor is it necessarily one that should take a backseat to strategic or financial considerations.

Instead, owners should seek to align the “three legs of the stool” - that is developing an exit strategy (or preparation for an unexpected exit) in which financial, business and personal goals (the three legs) are integrated, with all three playing a key role in decision-making.

Get your instant personal and business exit readiness score at Celestus.com, our Exit Planning Consultancy division.

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