The Boomer generation has been one of the most entrepreneurial in the history of our country. During the last 30 years, over 5 million businesses with annual revenues ranging from $1 million to $75 million were founded. The owners of most of these businesses are Boomers who are now between ages 51 and 69. They are beginning to think about what comes next. Recent studies sponsored by, or conducted by, PriceWaterhouseCoopers, MassMutual, Rutgers, Marquette University, University of Dallas and the Exit Planning Institute showed that between 34%, 55% and as high as 80% (depending upon the study), of privately held companies will change hands between 2006 and 2016. Although the Great Recession caused many business owners to push their departure to a later date, the fact remains that 64% of all privately held businesses in the US are owned by Baby Boomers who are thinking about stepping aside, or leaving altogether. Given the facts, we can expect a glut of available businesses and downward price pressure for most privately owned companies. True, there are plenty of buyers laden with cash looking to acquire businesses today, but they are now more discriminating than ever. That trend will continue as more Boomers decide to put their businesses in play.
How Boomers Plan to Transition
According to the American Family Business Survey, sponsored by MassMutual, approximately 30% of these owners plan to sell their business to a third-party buyer. Another 30% plan to sell to a family member, while another 18% plan to sell in some manner to current employees. The remainder plan to close and liquidate the business. However, the percentage of those hoping for a third party sale might actually be much higher than the studies indicate. Many who plan to transition the business to another family member will find this strategy not feasible for a number of reasons. Perhaps the would-be successor lacks the desire, expertise, or, does not meet the requirements to run the family business. Those who had planned to sell to a third party a few years ago but had to delay their transition when the Great Recession hit are now thinking about moving forward. Now that the economy and their businesses have recovered, these owners are ready to enter the market, adding to the number of opportunities for potential acquirers. Notice I said that “the owners” are ready. The question is, how ready are their businesses?
The Cost of Not Planning
Tragically, according to the PriceWaterhouseCoopers study, approximately 75% of private business owners have no written strategic transition plan in place. An additional 25% have done little or no estate planning. According to the 2013 study done by the Exit Planning Institute, an astonishing 83% do not have a plan, or, have not documented or communicated their plan with their family, advisors, or key people. This is a recipe for disaster. These ingredients are essential to preserve or maximize wealth, to minimize tax, and to insure that the business owner’s vision becomes a reality during his or her lifetime, or, posthumously. Anyone who is serious about transitioning needs to be well-prepared in order to compete for the most desirable acquirers, or to preserve the family business for future generations. For those business owners who intend to sell to a third-party, it will become exceedingly important that they position their business to transition successfully in an increasingly competitive market. With up to 55% or more out of every two business owners looking to transition over the next 15 years, there will be a glut of businesses on the market. Now, more than ever, it is important that every business owner focus on doing everything he or she can to increase the attractiveness, value, and salability of his businesses.
Chaos or Peace of Mind and Wealth Preservation through Transition Planning
A transition plan is a comprehensive, integrated plan that asks and answers all of the personal, business, legal, financial, tax and estate planning issues that are involved in transitioning out of a privately held business. This plan shows business owners how to begin positioning themselves and their businesses so that the owners accomplish all of their personal, financial and business lifetime goals. Planning for both the business owner and the business are key to a successful business transition, whether they plan to transfer the business to family, employees, a charitable trust, or to a third party.
When preparing the business, business owners will need to focus on improving profitability, building a management team, growing revenue, and a host of other critical issues in order to make their companies more attractive and to maximize the after-tax proceeds they receive at the time of transition. When preparing the business owner, taking steps to address personal financial issues and the emotional side of leaving the business merit special attention and preparation to insure a successful transition.
Good Reasons to Begin Transition Planning Now
- There are more buyers in the market than sellers
- There is plenty of liquidity in the market to finance transactions
- Interest rates are low which makes borrowing attractive for buyers
- The economy is currently expanding and we are in a strong economic cycle which creates a good environment in which to sell.
- It takes approximately 2 years of focused activity to get your business ready to sell at a reasonable or maximum value.
The Pay-Off for Those Who Prepare
Transition planning delivers tangible results for savvy business owners. It is not uncommon for companies that have invested the time and effort to prepare themselves for sale to sell for a significant premium over companies that come to market unprepared. In addition, with good planning, business owners are often able to reduce, or in some cases, defer or totally eliminate the capital gains taxes due at the time of sale. This dramatically increases the after-tax net proceeds that owners keep. But the most often overlooked benefit of transition planning, and perhaps the most important, is the peace of mind that comes when a business owner knows that he or she is being proactive and taking charge of the future, rather than waiting passively to let the future take care of itself. After all, deciding how and when to transition a privately owned business is perhaps the single most important financial and personal decision in a business owner’s lifetime.
How to Get Started
Start the ownership transition planning process by getting informed. Seek information from the best independent and objective sources possible. One good place to start is to talk with trusted advisors like your business consultant, attorney, accountant, financial advisor, or insurance professional who focuses on privately held businesses.
Joan M. Ridley (CEPA, CBI, CFP™) is an author, speaker and President of Business Wealth Solutions, LLC. She leads design and implementation of strategies to help business owners exceed their goals before and after retirement. She has more than 30 years of experience advising business owners and managing their business and non-business wealth.
Copyright 2015 Joan M. Ridley