Tim Kinane

By: Patrick Ungashick

Have you ever attended a presentation where the speaker asked audience members to raise their hands if they believed themselves to be an above-average driver? Typically, about 95% of the people in the room raise their hands. This would be impossible, unless the room was full of Formula One and NASCAR drivers. In a room full of randomly selected adults, 95% cannot be above-average drivers. There is a scientific explanation for what is happening, and it offers critical insight for business owners hoping to exit happily one day in the future. Here’s why.

The scientific principle at work is most commonly called illusory superiority, and most of us suffer from it at one time or another. Illusory superiority is a cognitive bias wherein a person overestimates his or her abilities and qualities relative to others. Several psychological experiments have revealed illusory superiority in action. For instance, in a 1977 study, a whopping 94% of professors rated themselves above average relative to their peers. Other studies have shown people tend to overestimate how charitable they will be, or of course their driving skills. Interestingly, illusory superiority seems to be rooted in North American culture—in many Asian societies; the phenomenon does not exist.

The illusory theory also applies to business owners contemplating exit. Most business owners know that the exit process is typically stressful and difficult and that a significant number of owners fail to exit when they want, how they want, and for the value that they want. But, most owners also seem to feel that they are unlikely to suffer any of the obstacles or setbacks that commonly plague others. In exit planning and our experience, most owners overestimate their readiness to exit and underestimate the challenges they will face. This behavior is illusory theory in action.

Psychologists who study illusory theory offer explanations as to why it occurs, which can help business owners better approach exit. A leading cause for illusory behavior is that “soft skills” like driving, lack rigorous mechanisms to measure and verify one’s competency, allowing us to assume that we are more qualified and prepared than we might actually be. That’s why people over-estimate their driving skills but are unlikely to over-estimate harder skills such as playing golf or piloting a plane, where one’s competence or preparedness are unequivocally revealed.

When getting ready for exit it is easy to assume that you are sufficiently ready and prepared, particularly if you have never exited from a company before. This assumption leads to underestimating the work that needs to be done and the time required to do it—arguably the biggest mistake owners make. Most owners lack tools and mechanisms to objectively evaluate how ready they and their company are to exit, and how likely they will achieve their exit goals. This too is the illusory theory in action.

If you are like most owners, you have too much at risk at exit to assume you are adequately prepared. Consider the following steps and resources to have a better plan:

• Educate yourself on the key questions and issues that most owners face as their near exit. Once you start telling yourself you want to exit sometime within the next five years, you will have work to do and must identify how and where to get started.
• Research what goes into an exit plan. Many owners will say, “Sure I have an exit plan” without knowing all the elements and areas that a sound play must address. This comprehensive article can get you started.
• Work with advisors who have helped owners like you achieve their exit goals. Your exit is too important to leave it to people who are not specialists.

If you have a quick question coming out of this article or, if you want to discuss your situation in more detail, we can set up a confidential and complimentary phone consultation at your convenience contact Tim 772-221-4499.

TAGS: Business Advisors, Business Exit Strategy, Sell Business

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