Business owners are a unique breed. They’d rather take the risk of working for themselves than being someone else’s employee. They often are visionaries – believing in an idea that can solve a need better than their competition, with greater convenience and value. They also are susceptible to certain cognitive biases that can undermine their quest for a better life for themselves. See if you recognize yourself as having any of these business owner cognitive biases.
Anchoring is a cognitive bias that places disproportionate weight on recent events. Business owners, especially ones with a successful business, think that they will be able to continue running the business well past the time when they should. They think succession planning is something to consider when they approach the traditional retirement age. This can lead to another bias known as the planning fallacy.
The planning fallacy is the tendency to underestimate how long it will take to complete a task or project. Successful succession planning may take the better part of a decade or more to assemble a competent team, vetting future owners and observing whether they can function effectively as a team. Most importantly, can they demonstrate an “ownership mentality.” The planning fallacy can be especially dangerous for business owners who believe that the market for their business will be most attractive when THEY decide it is time to sell.
Many business owners view the sale of their business as a significant part of, or the entirety of their retirement plan. This is dangerous on several fronts. It ignores the possibility of a sudden health issue that could force the sale of a business on unfavorable terms. This strategy often results in the business owner walking around with a number in his or her head that they want or need for their business, regardless of what market conditions may be when a sale is being considered. Periodic valuations can help to keep things real.
One of the best ways for the eventual sale of a business to be a less significant liquidity event is to have a plan to systematically transfer assets over time from the company’s balance sheet, to your personal balance sheet. As a planning firm, we have deep experience dealing with graduated transfer strategies that can help to diversify your personal balance sheet, without starving your business of assets that it needs for growth.
We all have cognitive biases – it’s how we are wired. Being aware of our biases, and then developing strategies to compensate for our tendencies, can help a business owner use their greatest asset, their time, to maximum advantage. If any of these cognitive biases have touched a nerve, reach out to us. We’d enjoy beginning a conversation with you.
PLEASE SEE IMPORTANT DISCLOSURE INFORMATION HERE.