If you’re a private business owner, the odds are 2:1 that you’re a baby boomer (born between 1946 and 1964). Nearly two thirds of all private businesses today are owned by baby boomers – currently 53 to 71 years old. While boomers are holding on to their businesses longer than ever before, most will want or need to exit their business within the next 5 to 10 years. That could be good news if you’re looking to buy a business, but the market is about to get much more challenging for owners looking to exit.
Unlocking the wealth in a business is no trivial affair, particularly given that 80%-90% of most owners’ financial assets are tied up in their business. Owners are banking on their ability to monetize this wealth to ensure their financial security and lifestyle once they exit.
However, statistics show that only 20%-30% of private business transitions are successful; in most cases the business is liquidated for pennies on the dollar or the business just shuts down.
These startling facts will have a significant impact, not just for business owners and their families, but for everyone who depends on the successful transition of that business – partners, employees, suppliers, customers, supported charities, and entire communities.
So why do business transitions usually fail? There are five key reasons:
Most privately owned businesses, even if thriving, are not well positioned as a transferrable asset. There are a myriad of factors that affect the overall value of a business, but for example, even a booming business that relies too heavily on just a few customers, suppliers or employees, or that doesn’t have well documented processes in place, or doesn’t have a strong management team that can transition the business to a new owner, will make its continued success under a new owner much riskier, and therefore less appealing as an acquisition.
Once the decision to exit is made, most owners have not allowed themselves enough time to position the business for transition, minimize taxes and maximize net proceeds. Typically, owners significantly underestimate what exiting successfully will require. Even if a business is well positioned for transition – and most are not – the majority of owners do not allow enough time to take full advantage of financial, tax and estate planning options. As a result, many owners end up with significantly lower net proceeds.
Nobody likes to think about worst-case scenarios, but the fact is that about half of all business owners are forced into an exit with suboptimal timelines and terms due to an unplanned event. Unless contingency plans have been put into place, an unexpected event such as a death, disability, divorce, departure or disagreement, can put the entire business at risk. This holds true on the flipside as well – even if an unsolicited offer is received from a buyer, it’s unlikely that the full value of the business will be realized if the owner is unprepared.
It’s rare that an owner will receive a windfall upon closing the sale of their business. Whether it be due to seller financing, holdbacks, earn-outs, management or partner buyouts, employee stock option plans or family transitions – more often than not, transition terms require continued profitability for a number of years after the owner exits to achieve full pay-out. Most businesses experience a decline following a transition, and owners do not realize the full value they expect to achieve when they exit.
Many owners have a business that cannot operate without them, is under-capitalized or has insufficient cash flow to successfully transition. These issues often eliminate the possibility of an inside option and also make it extremely difficult to achieve even a partial sale to a third party, particularly in an increasingly competitive buyers’ market.
When you boil it all down, 70%-80% of transitions fail because most business owners are not adequately prepared. Typically, it takes at least two to five years to do the things required to position a business as a transferrable asset. So, if you’re a business owner, you’d be very wise to start positioning your business as a transferrable asset now, regardless of when you plan to exit, to ensure that you can harvest your life’s work at an optimal value.
Rizolve Partners is a trusted strategic advisory firm dedicated to helping business owners achieve peak value. If you’d like to learn more, let’s have a conversation. Are you curious about how transferrable your company is and what you would need to adjust to transition it successfully when you’re ready? Then perhaps it’s time to for us to connect so we can discuss your company’s Value Builder Score and how to make your business (and your life) more attractive! You can reach us in any number of ways here.