Exit Strategy and Succession Planning are the hot topics of the day. “Beginning with the end in mind” helps a business owner to drive the business in the direction that will fulfill its purpose and objectives. This mantra holds true with the long-term goals of the business owner. All too often, business owners come into our office mentally, emotionally and sometimes physically ready to exit their business. Unfortunately, the business is not ready to be placed in the hands of the appointed successor (an unrelated 3rd party – buyer, key employee or family members).
In such cases, we end up with results that are disappointing at best and often devastating. Devastating? Yes. The business does not thrive and sometimes it does not survive once the owner exits. The impact of such scenarios flows from the business to employees, to families, and to the greater economy.
Sometimes, business owners are so focused on the day to day operations that they fail to look ahead. However, most often, business owners believe that the business, which has provided a good lifestyle for them, will be valued equally by others. Unfortunately, we end up being the bearer of bad news:
- Business value falls far short of what is needed for retirement. “That’s it? That’s all it’s worth? For all those years of blood, sweat, tears and sacrifices?”
- Key employee/family member has no interest in taking over the business. “Why wouldn’t they want to own this business?”
- Key employee/family member thinks the owner will fund 100% of the purchase of the business, or, better yet, will give the business to the key employee/family member since he/she has worked there. “What makes them think I would give them the business for $0 down?”
When is the right time to build an exit strategy?
The best plan is to start now. You are already operating your business today. Why not incorporate into the business plan goals and objectives that enhance the value of your business, improve cash flow, cultivates talent for a successful transfer of ownership/leadership?
While it’s easy to say I will do it someday, there are impending dramatic changes that will directly affect business owners. Haven’t you noticed that Exit Strategy & Succession Planning are the hot topics of the day. Why? With more than 60% of privately held small businesses owned by Baby Boomers, at an average age of 67, it is anticipated that there will be a massive exodus within the next several years.
The demographic trends set the stage for impending change on a large scale – a dramatic shift in supply and demand. Here’s the scoop: Baby Boomers represent a huge sector of the population in the US. The next 2 generations, X and Y, are much smaller. Their values are fairly similar to those of the Baby Boom Generation. And, then, there are the Millennials – a generation larger than the Baby Boomers. Based on studies, Millennials are described as a well-educated generation, burdened with student debt, reluctant to commit long term, and having a high priority on lifestyle, freedom and free time. Not exactly a fit for being a business owner.
What does this change mean to business owners?
It all depends on where your business is in its life cycle and if that position, along with the market conditions, match up with your future plans of exiting your business.
Working with business owners over the years, I have found that the sale of the business was not a planned event. It was a decision made when the owner was “done”. In a fluid market with readily available capital and future expectations of solid growth, business owners fared well. Good businesses were hard to find and buyers were eager.
However, the market has changed. Yes, today, it’s still hard to find good businesses for sale. But, the biggest difference in today’s market is the future growth expectations are generally lower and sensitivity to risk (highlighted by the “Great Recession”) has left a permanent imprint on buyers. This directly impacts the types of businesses that will successfully be sold and the value at which the businesses are sold. (perceived value?)
So, for those business owners who have grown and developed their businesses with the well-designed plan to exit, whether by selling to an unrelated third party, a key employee or family member, they are likely to be in good shape.
For those who have not planned their exit strategy, or even started the conversation of what do we want to do with the business, the time is NOW!!! The alarm bell has gone off! Here are some statistics to consider:
- 40% of Business Owners do not know what they plan to do with their business at retirement.
- 30% of Business Owners plan to sell their businesses to an unrelated 3rd Party.
- 70% of businesses for sale fail to be sold.
- 30% of Business Owners plan to transition/sell the business to key employee(s) or family.
- 70% failure rate of family businesses from 1st generation ownership to the 2nd generation.
Lack of Planning is the key factor in the 70% Failure Rate.
No planning or a lack of planning this critical component of business ownership is the key factor in the high failure rate.
Take the initiative today! Talk to professionals and advisors about developing an exit strategy. These simple steps will dramatically improve your perspective of where your business is today, where you want the business to be when you exit, and under what terms you want to exit. Then, you can incorporate exit strategies into your business plan.
One of the reasons people start businesses is because they want to determine their future. Continue with that vision in mind and start the conversation about your exit. It’s always great when you can design a future outcome on your terms.
Contact the Business Mentor Team for your next steps today.
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