Did you know that only 30% of family-owned businesses survive into the second generation? Or that only 12% survive into the third? These numbers from the Exit Planning Institute demonstrate the problem with a lack of succession planning. Take a look at our infographic, which illustrates the need for exit planning, and steps that owners can take to solve this problem.
As first appeared on Kiplinger.com.
By Nick Giacoumakis, CEPA, Founder and Principal, Business Succession Advisers, LLC
Investors often enjoy the excitement that comes with a strong bull market as we watch our investment portfolios grow. During these times, we aim to maximize the value and performance of our investments. And when bear markets hit, we seek to protect these assets.
Whether we’re dealing with expansion cycles or recessionary risk cycles, we’re constantly seeking to build, protect and optimize our portfolios. Whether it’s stocks, bonds, real estate or other private investments, experienced professionals such as CPAs, wealth managers, investment bankers and attorneys are utilized to help investors navigate through these cycles. But when it comes to how business owners manage their largest investment — the closely-held business that they’ve built — they often do not seek the same necessary professional help and guidance needed to accomplish their goals.
As a wealth manager and investment adviser over the past 25 years, I’ve developed and counseled a diversified clientele. I’ve had the opportunity to help a substantial demographic: the small-business owner. One critical area I’ve discovered they need help with is business strategy and enhancement.
The small-business owner often overlooks their most valuable investment for their retirement and their legacy: their business. Most business owners work tirelessly year-after-year to operate, sustain and grow their companies, but they may not be spending nearly as much time examining planning and strategy. Implementing proper business strategy, in alignment with their goals, will help them capitalize and increase the value of their largest investment.
ONE MAN’S STUMBLING BLOCKS TO SELLING HIS BUSINESS
A prospective client recently came to our firm looking for guidance with a business succession strategy for his food and beverage distribution company, which he has been operating for over 25 years as the sole owner. The company is very profitable, with high margins, the owner is in his late 60s and enjoys a comfortable lifestyle. However, he’s currently working about 45 hours a week, and he’s concerned about the future of his business if he dies or becomes disabled. Since he’s feeling the fatigue of his age and yet still working hard, he wants to sell his business and retire.
I discovered that this business owner is facing three common challenges that will diminish the value of his company when he sells:
- The company is heavily owner-dependent; the owner is spread too thin among many areas of business operations and client relationships.
- The business is dependent on the owner’s ability to run the company and lacks a talented management team that could resume operations in the event of a long-term absence, sale or a succession plan.
- The company currently has a highly concentrated client base, where two clients represent over 55% of the revenue, lacking diversity.
SOME DISTURBING SMALL-BUSINESS STATS
Take a look at these statistics from the Exit Planning Institute, a provider of education and tools for exit-planning professionals, keeping in mind that one’s business is typically the largest asset in a small-business owner’s investment portfolio:
- 70% to 80% of businesses put on the market don’t sell.
- 95% of mergers and acquisitions professionals believe a business owner’s unrealistic expectation of their company’s value is the biggest obstacle to a sale or transfer.
- Only 30% of all family-owned business survive into the second generation, and just 12% into the third.
- 78% have no formal professional transition team; 83% have no written transition plan; and 49% have done no planning at all.
- Half feel ownership-transition plans require the company to remain profitable for plans to be properly executed, yet 86% have not taken on a strategic assessment or a business value enhancement project.
3 VITAL PLANS TO PUT INTO PLACE, FOR YOUR OWN SAKE
Considering that in many cases a privately owned business is a self-employed person’s largest asset, many of these owners are failing in three of the most important areas of planning and running the business. Smart planning in these three areas can help with their retirement goals and the transfer of wealth to future generations or family members:
- Execute a business value enhancement plan involving trackable key performance indicators.
- Build a business succession plan with buy-in from other stakeholders, enabling the business owner to have a smooth transition into retirement.
- Prepare for the possibility that the owner might wish to sell the business. Explore the five most common methods for maximum value: a strategic third-party acquisition, financial buyer such as a private equity firm, purchase by company management, family purchase (or a combination of both) or finally an ESOP (employee stock ownership plan) sale.
With mindful planning, small-business owners can greatly reduce or eliminate the challenges that are faced during the inevitable times of transition. It can also help enable the business owner to maximize their investment to its fullest potential. With focus, diligence and a proper strategy we have the ability to achieve a comfortable, rewarding retirement. One that will fulfill not only our hopes, goals and dreams, but also enable us to leave a legacy, if planned properly, for our families, heirs or our favorite charities into future generations.
If you have questions about preparing your exit strategy, contact Nick Giacoumakis.