Is It Too Early to Plan a Business Succession?

posted in: Blog

Despite the absolute certainty that every business owner is going to leave his or her business at some point in time, either voluntarily or otherwise, less that 10% of owners have a written transition or succession plan for leaving their business. The above graph shows the many reasons why they haven’t planned yet, with the far majority saying that it is “too early”. Even with Business Owners in the 60+ age range, a third of them say that it is too early.  Aren’t Business Owners forgetting that they don’t always have complete control of when an exit will happen? An unexpected offer, or worse, an unexpected death, disability or illness could happen at any time, putting your family, employees and in some cases, even yourself at great risk of the business going into major decline in your absence and the possible loss of any value that business has.

Is it “too early” to Plan?

In the book “Valuation for M&A” by Chris Mellen and Frank Evans, it states:

“M&A advisors disqualify roughly 65% to 75% of prospective sellers.  Only 20% of the businesses that are for sale will successfully transfer hands to another owner.  This implies that only 5% to 7% of companies actually get sold.”

I believe the reason so few businesses are sold is because very few have a written exit plan. I also believe a big reason why 70% of Family Businesses don’t survive in the 2nd generation is because they didn’t do the planning necessary besides maybe tax planning.

You may agree that planning is necessary but you may say that it is still too early despite that fact that an involuntary exit could happen at any time. Well, know that it takes 3 to 5 years to put a business in salable condition. Most businesses are not salable in their current condition and an excellent way to see if your business is salable is to take the Sellability Score using the link on this page. This is a complimentary service I provide that is completely confidential and provides Business Owners with a score out of 100 of how salable your business is on 8 different factors.

One study found that 89% of Business Owners are dependent upon the proceeds of the sale of their business to fund their retirement. With only 5% to 7% of businesses that are actually sold, this puts most Business Owners and their families at a great risk of not being able to fund their retirement. An important part of a Business Exit Plan or Business Ownership Succession Plan is to help the business become salable and to maximize and protect the potential value of the business, and it is important that Business Owners give the planning and implementation of the plans enough time.

“Too Complex and Intimidating”

Often, when you ask a business owner when they are going to leave their business, they’ll say five years from now. If you ask them three years later, it will still be five years from then. Business owners often think they can’t afford to leave their company because it doesn’t have enough value to fund their retirement. They’re not sure what they need to do to increase its value, but they think they will be able to fix it in five years.

Business Owners often know how to start and grow a business but know very little of how to transition out of their business. In some cases, the business has stopped growing or gone into a decline and the Owner has been unsuccessful on turning it around. In both these cases, the Business Owner can’t do it on their own.  There is help available.  Look for professionals that specialize in Exiting Planning and helping businesses increase the value and sellability of businesses.

Business Succession Planning is a complex subject because it is a mix of business and personal planning. At the same time, this planning needs to consider the owner’s standing in their community and the possibility of disrupting most of their cherished relationships.  It also helps to address how the Owner will get their equity out of their business without too much disruption, while satisfying the largest number of people possible (including the managers who helped to build the business).  The complexity can seem too great to tackle so most owners do not try. They need to turn to those that can help.

Owners who are open to heading down the path of exit are next confronted with the issue of the transaction’s complexity.  Owners need to navigate valuation issues, identifying the best next owner of the business, forecasting the future of the business, running a process to communicate this ‘future value’ to the next owner, negotiating a transaction, figuring out not only how much they will get paid but when they will get paid, assessing the tax implications of the deal, and finally trying to figure out if, when the deal is done, they will have enough to maintain their lifestyle.  All said and done, this is a substantial challenge for any owner to tackle on their own.

More Important than Ever to Plan Now

With the aging Baby Boomers, it is expected that 70% of Business Owners will want to transition out of their business in the next 10 years. In addition, the last recession has made many Business Owners to think that once they get their business more profitable again, they will sell it before the next recession.

With so many Business Owners “eyeing the door”, the supply of businesses for sale will further outpace the demand that it has in the past. Likely valuations will be lower and the probability of closing a transaction will drop.  It is likely that only the most attractive businesses will be bought for top dollars.

It is crucial that Business Owners put their business in prime shape to sell and to take steps to make this happen now. You, your family, your employees and the overall economy are dependent on it.

Graph from: 2007 ROCG Survey of 502 business owners in U.S. and Canada