Why Entrepreneurs Naturally Resist Exit—and What to Do About It
Growing up in the 70s, I remember mom playing The Byrds’ 1965 hit, “Turn! Turn! Turn!” While it is a simple song taken from one of the most famous passages in the Bible (Ecclesiastes 3), truth be told, I found it quite confusing. At the heart it is a series of opposites:
• A time to be born, a time to die
• A time to plant, a time to reap
• A time to laugh, a time to weep
• A time to love, a time to hate
• A time to gain, a time to lose
As a child I didn’t understand the natural cycles and systems described. But, I often think of those words today when dealmakers and advisors tell me about a business owner who is resisting the exit process. Somehow, entrepreneurs have convinced themselves that owning a business can go on for eternity.
Sumner Redstone is a contemporary example. The 92-year old owner of Viacom famously boasted that his exit plan was to live forever. Unfortunately, his plan failed when his mental competency was challenged before the court. Despite the out of court settlement, Redstone was removed from office and his family is now reported to be fighting over control.
Why do entrepreneurs achieve things others cannot, yet fail to plan for an inevitable transition? At the core, business owners are facing the same challenge that all people face. Our human experience includes a psychological need to embrace the familiar while rejecting (where possible) choices that will disrupt our world or move us out of our comfort zones.
Entrepreneurs will tell you that they chose this lifestyle because working for someone else would have led to persistent and pervasive frustration and dissatisfaction. Here’s why: owners take risks nobody else would take; they navigate the ambiguity of uncharted waters with ease; they are resourceful and innovative; they constantly push themselves (and others) to achieve goals that exceed expectations; and perhaps most notably, they have a high need for control. These characteristics are essential for building a business, but when it comes to exit, these same entrepreneurial strengths have a tendency to become an owner’s Achilles Heel:
• Risk taking propensity: Not planning for exit is a risk that pales in comparison to the risks inherent in running the business.
• Innovativeness: Business owners are not fond of the tried and true, one-size-fits-all approach. Advisors run into a brick wall when they attempt to engage owners with an overly rigid approach to the concept of exit.
• Tolerance for ambiguity: Owners have cognitive frames of reference that allow them to endure increasing amounts of ambiguity. A byproduct of this trait is desensitization to the importance of detailed planning, particularly for a paradigm they haven’t adopted.
• Goal achievement: Entrepreneurs do not feel any compulsion to “own” a goal somebody else sets for them and exit is not a goal most will owners will naturally set.
• Control: Exit is a part of the organizational life cycle that owners are least familiar with and it requires owners to give up a measure of control.
For most owners, even the thought of exit upsets their self-concept and their role in the world. Thus, it makes sense that owners would double down and do business the way they always have. Owner resistance to exit comes in a variety of forms, each of which makes matters worse:
• Delay: This is largely attributed to the tyranny of the urgent. Owners are busy people with no shortage of fires to fight and it provides a justifiable excuse for not engaging in planning for something that is not eminent or urgent.
• Denial: Owners easily adopt fallacies such as exit is not a problem that needs to be solved” or “exit is 5, 10, or 20 years in the future and I can control the timing” or “the chances of getting hit by the proverbial bus are slim”.
• Self-Deception: Too often, owners fool themselves into believing they are prepared for exit. They see a lawyer for their will, trust, and/or estate plan; they are well insured; maybe they even have a secret file that names their replacement if the owner is suddenly incapacitated. But, all of these fall short of a robust exit plan that prevents the destruction of wealth and legacy.
Does that mean all is lost and advisors should throw in the towel waiting for a trigger event? Not at all. While each of the traits may lead to exit challenges, they can also be used as strengths when advisors take an owner centric approach. Here are a few quick examples:
• Risk: Owners do not see exit as a risk that needs to be mitigated. Trusted advisors earn the right to be heard by helping the owner think about strategically structuring the business to maximize value, developing contingency plans, and creating options so that the owner and their business benefit regardless of the owner’s personal situation.
• Ambiguity: Do not expect owners to sign up for building time consuming detailed exit plans. Simplifying the complex is hard, but this is exactly what owners need from advisors. Break each component of your exit offerings into their simplest “bite sized” forms that the owner can do as independently as possible. Ideally owners will experience incremental value with each step.
• Innovativeness: Advisor centric systems and processes do not activate an owner’s curiosity. Provide value adds that stimulate an owners natural competitiveness, creativeness, and curiosity. Host a limited number of focused gatherings throughout the year to add value for your owner clients. Use these moments to create opportunities for owners to learn from other owners and let satisfied clients informally tell your story for you.
• Goal attainment: The owner has to set the goal to own the goal. Advisors who act as coaches have a well-honed set of open-ended questions that empower owners to explore exit. Advisors leverage the owner’s need for goal attainment by helping owners self-discover ways to enhance their success and commit to new goals.
• Control: Most owners have a mental model that says, “Maintain control at all costs.” They perceive exit as a process focused on giving up control. Wise advisors embrace the owner’s need for control by demonstrating via a variety of scenarios how preparing the business for exit gives the owner more control, not less. It empowers them proactively design control into their exit strategy instead of responding reactively and being forced to choose from a limited set of less than optimal options.
For more insight into the psychology of the business owner, you can download our white paper.