It’s a conversation most business owners and their families don’t want to have. The conversation about what happens next with the business. Next as in when the current business owner is no longer working in the business. Next, as in how do we effectively manage that transition to ensure that the investment made in the business provides the best possible return for the business owner.
So what happens next?
Most privately held businesses in America are what is called “Lifestyle Businesses.” They support the lifestyle of the owner. The average business owner has 80-90% of their wealth tied up in their business. According to the Wisconsin Chapter of the Exit Planning Institute[i], 63% of Business owners need the income from their business to sustain their lifestyle; 56% will need income from their business to maintain their retirement regardless of whether or not they sell or keep the business. Given that large volume of money, the logical and prudent thing for a business owner to do is to plan on how the money they have tied up in their business will help them when they no longer can or choose not to work in their business any longer. This will require much more than a conversation with your Accountant or Financial Planner. The sad reality is that more than three-quarters of business owners have no plan for how they will reap the benefit of the wealth in their business.
The 2018 Wisconsin Chapter of the Exit Planning Institutes EPI State of Owner Readiness Report[ii] provides good information about the preparedness of Business Owners for when they leave their business.
“Many business owners who fail to plan for their transition face many regrets:
- Business owners realize they should have integrated a value acceleration process to prepare themselves and the business much earlier.
- They realize after the fact that they left money on the table because they did not maximize the value of the business at the time of exit.
… 92% of business owners surveyed indicated that they had no written personal plan and 43% indicated they had done “no planning at all,…” “
Many business owners intend to sell their businesses as a means of converting the business to cash to support their retirement years. According to the Exit Planning Institute, approximately 80% of businesses that are put up for sale DO NOT SELL. This is primarily due to the owner not fully understanding the true value of their business and as a result, having unrealistic views of their business’s value. This can be remedied by improving key performance areas such as production, service, labor quality, efficiency, etc. in your business.
Business Transition can be planned or unplanned. The unplanned transitions, commonly called the 5 D’s can be traumatic. The 5 D’s are Death, Disability, Divorce, Distress, Disagreement, You can help make them less so by simply planning for the inevitable. Like it or not you WILL leave your business at some point.
Let’s begin with the options you have. You have several choices:
- You can close the business and go home
- You can sell the business and do something else
- You can keep the business, hire someone to run it and collect a profit check every month
- You can pass it on to your children or other family members.
Each of these options has positives and negatives. Some of you have businesses that simply won’t sell. In that case, closing might be your only option. However, that isn’t a good option if you can hire someone to run your business while you enjoy the profit from it.
Remember that for many small business owners their business is a means to have an enjoyable life after work, in other words, your retirement. It should provide you with the income and the security that comes from that income for all of the things you want to do.
Selling the business puts some money in our pocket. But understanding that the cash you receive for your business may well be reduced because of liabilities, taxes, etc. could put a damper on that idea. Planning could reduce the cost of these reductions.
Regardless of the direction you wish to go, planning is critical in ensuring you get the maximum value from your business. Planning the departure from your business is probably the last thing you want to do but it is an incredibly important thing to do. Getting the greatest value from their business is what we help people do. You can learn more about that through our free ebook Planning Your Business Exit – It’s Inevitable, One Day You Will Leave Your Business.
[i] EPI State of Owner Readiness Report 2018 Wisconsin © Exit Planning Institute
[ii] ibid