The sudden and unexpected economic impact of issues surrounding COVID-19 likely has business owners who were considering selling and exiting their business reconsidering their strategy. The influence of these external factors may not be something you’d factored in or for which you have a contingency plan. So now, when it is clear what elements may impact the value of your business and how, may be the perfect time to begin putting an exit plan in place. The sooner you begin to plan, the better, since you may face substantial competition when you sell your business.
A 2019 survey of business owners by the Business Enterprise Institute, Inc. reveals information about those who own businesses, how they are planning for their exits, and trends that apply to business sales. Respondents reported yearly revenues ranging from $500,000 to $500 million. Business owners between the ages of 40 and 69 made up 80% of the respondents.
What trends may affect your ability to sell when you want, and for the price you need?
Baby boomers currently own many of the most successful businesses. As of this year, 2020, the youngest baby boomers are 56 years old. This combination of success and aging means that many business owners could exit their businesses within the next ten years or less, resulting in many companies on the market at once and much wealth will change hands.
This is demonstrated by survey results which indicate when business owners plan to exit their businesses. Since the “undecided” and “never” categories will eventually exit, almost 80% of respondents could be leaving their businesses within the next 10 years – 56% are planning towards that goal. 81% of respondents said they want to stop working in their businesses within the next 10 years.
Business Owners Planning to Exit
- Fewer than 5 years – 21%
- 5-10 years – 35%
- More than 10 years – 21%
- Undecided – 16%
- Never – 7%
Selling to an unrelated third party buyer is the most popular exit path with almost half of respondents expressing an interest in that method of leaving their business.
Preferred Exit Path (Note: Respondents could choose more than one path that was of interest.)
- Unrelated third party buyer – 48%
- Child or family member – 39%
- Management or employees – 39%
- Undecided on feasible exit path – 13%
- Close doors – 13%
- ESOP – 13%
- Co-owners – 11%
What have business owners done to plan their exits?
An encouraging number of owners, in fact 77% of them, say they have at least some idea of what they will do with their lives once they exit their businesses. In addition, 60% of owners say that they’ve determined their financial needs for their post-transition life. While this data suggests that business owners are considering a plan for when they exit, a large number don’t have a strategy in place for getting there. Consider these statistics:
- 79% of business owners do not have a written plan in place for the future of their business, although many have taken some steps.
- Between 45 and 56% have discussed their exits with family members, advisors or internal parties.
- Only 33% have obtained a business valuation.
- Only 21% have created a written plan for transfer of ownership or explored whether buyers exist.
What obstacles do business owners face that may prevent them from leaving their businesses?
Perceived obstacles included a need to improve their business first (33%), concerns about external factors (28%), and general uncertainties (12%). About 26% of respondents did not perceive any serious obstacles.
Interestingly, fewer than 6% of respondents considered the value of their business as it relates to their exit to be an obstacle when, in fact, it is foundational to a successful exit plan. Without knowing the value of your business, you cannot know how much your business must grow in order to be worth what you need upon your exit to achieve your financial goals. About 60% of owners try to determine the value of their business using informal methods or none. An independent and objective appraisal is where you need to start if you are serious about planning your exit. And you should be!
Now can be the perfect time to take a look at the long-term. Use some of this slower time to assess and make some decisions about your objectives. And take action on those things which you CAN control – like putting a solid plan in place to use as your guide as we move into what may be a “new normal.” I’d welcome the opportunity to help you sort through some details and get moving in the direction of your goals. Contact me for a complimentary review of your situation and your next steps, whether you have an existing exit plan or need to start one.