Lanny Bassham is an authority on mental performance. After receiving the gold medal for marksmanship in 1976, he became curious about how the lives of Olympian athletes were changed after winning the gold medal in their sport. He decided to interview other gold medalists in preparation for his book, “With Winning in Mind.” Similar to his own experience, he discovered that many of the Olympians he interviewed had become seriously depressed. Essentially, they had outlived their dreams and aspirations. All that they had set out to accomplish, all the hours of practice and dedication they had invested, were behind them. Bassham’s overarching message in his book is, “To remain relevant [and therefore healthy], you need to set another goal.” I agree with Basham’s conclusion. However, I believe that he left out one very important factor: one’s sense of purpose.
Why do we exist? Where do we bring value? What is our personal “why?” In other words, how do we define significance in our life? Walt Disney’s reason for “why” was to make people happy. Similarly, the purpose driving Zappos founder Tony Hsieh is delivering happiness. Mary Kay Ash’s significance was derived from bringing unlimited opportunity to women. Business writer Pat Lencioni says that if your purpose is one step removed from world peace, it’s probably right on course. A high-functioning organization always has at its core a strong sense of purpose. Likewise, individuals need significance, or a sense of purpose in their lives.
Purpose is vitally important to sustaining the life of a business. It is equally important to sustaining the life of its owner after transition. If you’ve owned a business for 10 – 40 years, and you’ve fulfilled your purpose through your business, the sudden shift to retirement is likely to be traumatic. Studies done on many transitioned business owners have revealed the prevalence of grief, loss and depression. The reason for this pain is the failure to define significance and adequately incorporate purpose into one’s life after business ownership.
John Leonetti, author of “Exiting Your Business, Protecting Your Wealth: A Strategic Guide for Owners and Their Advisors,” helps owners put thought into their business exit strategy. The first question he asks them is, “How financially ready are you to leave your business?” Financial readiness is the logical aspect of exiting a business. If you depend on your business to cover your living expenses, then you are probably not sufficiently wealthy to exit your business. The after-tax proceeds from the sale of your business must fill the gap between what you’ve saved and what you need in investment capital to maintain your lifestyle. Four percent [after-tax] annualized return from your invested capital is the benchmark often used by financial advisors in determining retirement readiness. For example, imagine you have $1 million saved at the time of your sale. Also, consider that $200,000 annual income after tax is required to sustain your retirement lifestyle. At four percent, you would require invested capital of $5 million. The after-tax proceeds from the sale of your business must be $4 million to fill the gap between what you’ve saved and your investment capital shortfall. The alternative is to reduce your living expenses and thus your retirement lifestyle.
The next question to ask is, “Are you succession ready?” Do you have a leadership team in place that allows you to leave the business without any worries? For example, based on a scale from one to 10, how likely is your business to survive in your absence? If your response is “10,” you’ve created a great leadership team to which you can delegate responsibilities and elevate roles. Thus, your business can continue operating without you. If your response is “5,” you’ve a long way to go. Developing your leadership team and preparing them for succession will mitigate risk to the buyer which will significantly impact the valuation of your business.
By far, the most important question to ask is, “How mentally ready are you to leave your organization?” This is the emotional question, and the one I focus on most when first meeting with owners seeking to transition from their business. To be mentally ready, you need to have a strong sense of who you are and what you want after the business is no longer part of your life. Unfortunately, too many business owners never stop to think about life after ownership until the day they are faced with living it.
In 2007, the Canadian research firm ROCG conducted a study of CEOs whom they asked, “Have you planned for your business exit?” Of the 502 CEOs that ROCG had surveyed, only nine percent answered, “Yes.” ROCG also examined the responses to see how many of the CEOs’ expectations had been met in terms of what they wanted from and for their businesses. Only 10 percent felt they were fairly compensated. Furthermore, only a third of the CEOs considered the transition process a good experience. Unfortunately, the study tells us that most business owners don’t give sufficient thought and effort to an exit plan and, therefore, unwittingly set themselves up for disappointment and failure when the time comes to retire.
The grief that business owners experience at the time of exit is comparable to the grief experienced from the loss of a loved one. The pain of this sudden loss hits the owner on many levels. At the time of transition, business owners risk losing their sense of identity, purpose and achievement, as well as both their personal and professional connections. The result is a perfect storm for which no advance preparation has been made for 91 percent of business owners.
In order to avoid these pitfalls, owners must plan their exits well in advance. When working with business owners, it is a priority of mine to keep them from being blind-sided during the transition process. Together we develop an exit plan with multiple options strategically important to their ability to finish strong. Healthy businesses provide owners with multiple options and, thus, allow them greater control over when and to whom they sell. Owners who want to sell their businesses need at least two years of preparation to create an effective succession plan and make sure their financial houses are in order. Timely business transition planning and preparation help them obtain the highest multiples for their business. More importantly, they gain clarity about who they are and what they want for themselves and their businesses before beginning the transition.
Purpose propels us forward as it excites us and enlivens our passion. It makes a positive impact on employees, stockholders, the community, and the world. Profit sustains us and is necessary to move forward and grow. It is the air that we breathe, the food that we eat. Companies with a strong sense of purpose in their culture are sustainable, scale up faster and outperform competitors in their industry by 10 to 100 times. Consequently, they maximize the financial reward to the departing owner. Money, however, is never enough. Business owners who have defined significance [prior to the door hitting them in the backside on the way out] depart with a renewed sense of purpose. Subsequently, they live happier, healthier and more rewarding lives post-transition by a greater margin than their counterparts who have not.
