You are reading: The Exit Planning Risk to Lenders

Sam Walters

Exit Planning Advice Specialist North America

In exit planning school, advisers are taught about the 4 Ds: Death, Divorce, Disablement and Dispute.

Any one of these on their own, if they occur to a business owner at the wrong time, can be catastrophic to a business. Even worse if more than one happen at once.

Lenders to these businesses, by extension, can inadvertently find their investments at risk.

In 2020, over 51% of employing business owners were 55 and over, according to the US Census Bureau. It is no secret that the older one gets, the higher the risk of death and/or disablement.

According to Pew Research, “grey divorce” has been on the rise for some time.

The thing about exit planning is, the defensive mechanisms put in place to make a business more valuable and more likely to sell for a good sum, have a lot of overlap with the things that protect the business from the above shocks.

For example, having a business with minimal reliance on the owner for revenue and day-to-day management will mean it can contend with death or illness far more easily.

Having gone through the exercise of putting together a shareholder agreement and an associated funding arrangement normally means a robust conversation has taken place around the long term objectives of the business and the owners in it, which means a decreased likelihood of dispute (and a proper pathway for an amicable departure should one owner feel the need).

Exit planning tends to be accompanied by better financial controls and balance sheet supervision.

Owners are typically overexposed to their business: often more than half their wealth resides in a business. Diversification is often sorely needed.

We would like to see a day when “recapitalization” becomes commonplace (e.g. borrowing by sound companies to take some chips off the table for the owner, and diversify by reinvesting in non-business assets).

Exit planning is the mechanism by which all of these moving parts can come together. And in our view, it is very, very much in the interests of lenders to Small and Medium Businesses to be advocating for exit planning.

Take a look at the Business Insights Report overview if you would like to know more.

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