By Maurie Cashman
The 2016 Business Owner Survey conducted by BEI provides some interesting insights into the mindset of owners toward planning for ownership transition. Owners between 40 and 69 years old comprised 80% of all survey respondents. Respondents reported yearly revenues ranging from $500,000 to $500 million. The survey included responses from members of the construction, professional and business services, and manufacturing industries, among others.
I will present some statistics and graphics from that survey along with my thoughts.
79% OF BUSINESS OWNERS PLAN TO EXIT THEIR BUSINESSES IN THE NEXT 10 YEARS.
75% WOULD EXIT TODAY IF THEIR FINANCIAL SECURITY WERE ASSURED.
100% OF BUSINESS OWNERS WILL LEAVE THEIR BUSINESSES, WHETHER PLANNED OR OTHERWISE.
I hope that by now you have accepted the inevitable in that each of us will leave our businesses sooner or later. Some of us may have to be carried out, but we will leave. The interesting statistic here is that a great majority of owners would leave today if they were secure enough to do so. Coupled with the fact that nearly 80% plan to exit within ten years leads to one of three conclusions:
- Owners need to close what appears to be a significant gap between what they think their business is worth and what they need to be secure;
- Owners don’t know the value of their business and could exit sooner than they believe; or
- Owners are unrealistic about their plans to exit within ten years.
The graphic below indicates that 72% of those planning to exit in the next ten years plan to do so in the next five years. A tremendous number of owners intend to transfer ownership somehow very soon.
HOW LONG BEFORE OWNERS WANT TO EXIT THEIR BUSINESSES
As owners think about transitioning ownership they appear to believe they have many options. There has been a major shift since the last survey in four categories however:
- Third-party sale
- Transfer to children
- Winding down the business
- Sale to private equity group
It is interesting to note that three of the four options cited are essentially single point events, with a transfer to children being the only potential transfer over time. This indicates real challenges when coupled with the earlier finding of owners who are not in a position financially to execute these options and achieve security.
45% BELIEVE THEY’VE IDENTIFIED ALL OF THE STEPS NECESSARY TO EXIT THEIR BUSINESSES SUCCESSFULLY.
22% HAVE OBTAINED A BUSINESS VALUATION.
37% WILL TAKE THE NECESSARY ACTIONS WHEN THEY ARE READY TO EXIT.
31% BELIEVE THAT THERE ARE OTHER ISSUES THAT REQUIRE THEIR IMMEDIATE ATTENTION.
17% HAVE CREATED A WRITTEN EXIT PLAN.
While it appears that owners have made some progress in their planning it is interesting to note that a) over half have not identified the steps necessary to transition ownership; b) nearly 80% have not had their business valued, and c) less than 20% have a written plan of any kind.
Whom Are Owners Talking to About Their Exits?
78% OF OWNERS HAVE DISCUSSED THEIR BUSINESS EXITS WITH A SPOUSE/SIGNIFICANT OTHER.
48% HAVE DISCUSSED THEIR EXITS WITH CHILDREN.
32% HAVE DISCUSSED THEIR EXITS WITH BUSINESS-OWNING FRIENDS.
ONLY 18% OF OWNERS HAVE TALKED TO SOMEONE WHOM THEY CONSIDERED TO HAVE TRAINING OR EXPERTISE IN EXIT PLANNING.
11% HAVE TALKED TO NO ONE ABOUT THEIR EXITS.
Of the last two groups, more than 50% still said they planned to exit within the next 10 years. Remember, nearly 80% of all owner said they did not feel financially secure in exiting their businesses now. Yet, it appears that they are not seeking professional advice in how they might get there in the time that they want to.
By a two to one margin owners believe they have no idea what the economy will change. This seems appropriate. Economic conditions will be a key factor whenever an owner attempts to transition ownership of the business. Sales may be falling, interest rates rising, credit tightening, competition increasing, and labor markets becoming more competitive. Much like investors in the stock market, owners may have a tendency to become complacent during a long period of good times and then react quickly based on emotion when things go south. Instead of having a solid plan that they are committed to executing investors make moves at the worst possible times. Are business owners falling into the same trap?
David Letterman after leaving the “Late Show”: “Everybody would come to me and say, ‘What do you want to do?’ And I kept saying, ‘Well, jeez, I did what I wanted to do’. Here’s what I have learned, if you retire to spend more time with your family, check with your family first.” I have talked with several business owners over the last month who have expressed concerns over what they would do if they left the business. This is a serious issue that deserves careful thought and planning.
Most business owners want to exit their businesses within the next 10 years, believe that their exits will occur because of planning and action items they implement, and most business owners have not created a written plan for their exits. Owners will need to understand the value of their business and create plans to increase and realize that value in order to create the security they need upon leaving the business.