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Optionality and Your Plans for Your Business Future

Originally published: 08.01.21 by Keven Prather


Optionality and Your Plans for Your Business Future

When many business owners first think about their business futures, their first question is, “Whom am I going to sell this business to once it’s my time to leave it?” It makes sense for owners to ask this question first, since the answer to that question can guide how their futures look. But this is a backward way of shaping a plan. Consider the short story of Bob Roberts.

Bob Roberts had had 40 years of success running his company. He was ready to sell to a third-party buyer who had approached him a year earlier. The buyer told Bob that they were willing to pay hi $6 million for his business, which Bob thought was more than enough to last him through his retirement. Bob always wanted to sell to a big player and retire in style.

Not long before Bob was set to close the deal, he received startling news. The buyer planned to absorb Bob’s fleet of trucks and book of business, and lay off 47 of his 50 employees. Bob cared far too much about his employees to let that happen.

He demanded that the buyer keep his employees as a condition of the sale. The buyer refused, and Bob took the business off the market.

When Bob tried taking his business to market a few years later, he couldn’t find anyone who wanted to give him even half of the original offer. He had tainted the marketplace by taking his business off the market early, and he still felt the negative consequences.

He found himself wishing that he’d taken the original offer and that he didn’t care so much about his employees.

In this example, Bob didn’t realize how important one of his values-based goals was because he never examined it. He dove headlong into pursuing what he thought was an ideal path. In reality, his ideal path was fraught with problems he could have avoided.

Optionality in Planning

Optionality is “the value of additional optional investment opportunities available only after having made an initial investment.” In terms of planning for your business’ future, optionality means your ability to choose an ideal Exit Path while still having the option to pursue other paths as backups. The “initial investment” is setting your goals and determining your resources. The “additional optional investment opportunities” are the Exit Paths you give yourself options to choose from. This optionality is extremely important because your conditions, situations, and wants can change as you plan for a successful future.

To most business owners, choosing their ideal Exit Path is the result of planning. Because business owners are typically results-driven, it’s where they want to start. However, before pursuing a path, you should determine whether your chosen path can achieve your goals and whether you have the resources to pursue a given path. Doing so creates optionality.

Optionality is valuable in planning because it gives you the freedom to pursue your future business goals on your terms. Optionality cannot exist unless you know your goals and resources. Choosing an ideal path isn’t the end of planning: It’s the means to the end.

Generally, there are four paths you can take to continue the business after you leave it.

  1. Third-Party Sale
  2. Transfer to Employees or Management
  3. Transfer to Children
  4. Sale to an ESOP

Regardless of which path you choose, one thing is almost always true: It’s unwise to pursue a path unless you know what your ideals and resources are.

For example, an owner who wants to exit their business in six months but sell to an insider will probably be unable to choose an ideal path at the outset. Only after weighing why they want what they want against how to get what they want can owners begin to seriously consider any path.

 


About Keven Prather

Keven Prather specializes in serving the complex needs of business owners through Financial Planning and Business Transition/Exit Planning. Using a Total Wealth Planning approach, Keven’s objective is to turn complex problems into actionable, understandable and manageable steps, by collaborating with business owners, their family, and strategic partners.” Keven can be reached at (216) 592-7314 or kprather@financialguide.com. www.TransitioNextAdvisors.com.

Securities and investment advisory services offered through qualified registered representatives of MML Investors Services, LLC. Member SIPC. www.SIPC.org. TransitioNext AdvisorsTM is not a subsidiary or affiliate of MML Investors Services, LLC, or its affiliated companies. Supervisory Office: 2012 West 25th Street, Suite 900 Cleveland, OH 44113. 216.621.5680. This report is intended to be used for informational purposes only. Neither MML Investors Services nor any of its employees or agents are authorized to give legal or tax advice. Consult your own personal attorney legal or tax counsel for advice on specific legal and tax matters. CEG Worldwide, LLC. is not a subsidiary or affiliates of MML Investors Services, LLC or its affiliated companies.

VFO Inner Circle Special Report By Russ Alan Prince and John J. Bowen Jr.

©Copyright 2018 by AES Nation, LLC. All rights reserved.

This report is reprinted with permission from VFO Inner Circle.

Unless otherwise noted, the source for all data cited regarding financial advisors in this report is CEG Worldwide, LLC. The source for all data cited regarding business owners and other professionals is AES Nation, LLC.


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