Many business owners, even though they eventually develop an exit plan, start the process too late to allow themselves the years they need to evaluate, cultivate and protect the value of their business. Don’t let that happen to you.
In a study by business transition specialists, ROCG, 84% of survey respondents indicated that, upon their exit, the proceeds from the sale of their business were critical to maintaining the security of their lifestyle. Yet no more than 33% of businesses actually complete the sales process. And only 42% of respondents to the survey had formal exit plans in place. Why no exit plan? Reasons given included:
- It’s too early to plan
- Exit planning is too time consuming
- The process is too complex or intimidating
- I don’t want to deal with the associated family and employee issues
- I don’t have, or know where to find, expert advice on exit planning
The statistics above certainly suggest a correlation between having an exit plan and being able to successfully finalize the sale of your business – an event that will likely be the largest financial transaction of your life.
But the wave of retiring Baby Boomers is a factor as well. U.S. census numbers show that some 10,000 people celebrate their 65th birthdays every day. The majority of business owners in the U.S. are age 53 and over. A 2014 survey conducted by Pepperdine University revealed that 67% of business owners planned to retire in the next ten years. As you can see, the impact to the market by the trend of retiring Baby Boomers is already substantial and will intensify, which makes having an exit plan even more important.
Forecasts from The Exit Planning Institute (EPI) indicate that 4.5 million firms, valued at more than ten trillion dollars, will go to market over the next decade. But EPI President and CEO, Christopher Snider, predicts that sales will actually be completed for only 20 to 23% of these businesses. He attributes the inability to sell to a lack of critical planning for this event, especially taking those steps which will help determine, retain and recover the full value of their company.
3 Factors Impacting Business Owners Looking to Exit
According to Paul Visokey, an expert in building and leading sales and marketing in startup environments, there are three additional major factors that are expected to impact these exiting business owners:
1. The Market Cycle
The U.S. is currently experiencing a robust bull market, favoring sellers. This momentum will eventually slow, causing a market downturn which will favor buyers. Often, the higher a market goes, the lower it falls. With the unprecedented rise of the market over the past eight years, a downturn could be severe, and the time frame for turnaround after a crash, is unpredictable.
2. The Number of Businesses for Sale
In addition to Baby Boomers who will be trying to sell their businesses, thousands of companies owned by private equity firms are typically for sale at any one time. Business owners younger than Baby Boomers are also seeking capital to fund growth initiatives. This not only creates competition for retiring business owners who want to sell their businesses but will likely drive down prices.
3. Lack of Capital
According to Visokey, there is not enough funding to satisfy all sellers who are looking to transition. He notes that, “If every business owner in the Baby Boomer demographic were to sell their business, the amount of capital required to close all those transactions is over ten trillion dollars. Currently, the private equity available to complete these transactions is roughly $535 billion.” This is enough capital to fund only about ten percent of the expected sales of businesses over the next decade. A lack of funding will create buyers that are very selective which may further drive down prices.
The Time is Now
The confluence of factors that will affect sales in the next decade may seem to paint an ominous picture. But you are not without some control. Start exit planning now! Make a promise to yourself that you will start to plan by 12-31-2018.
It is critical to identify the elements that drive your business, identify the gap between where you are and where you need and want to be upon exit, and then develop a strategic road map to achieve that value in your business at the precise time that you plan to exit. Exit planning is a complex process. It requires expert guidance and an advisory team to ensure that all aspects of the process are covered. Timing is critical. Planning, with plenty of lead time, can enable you to exit your business on your terms. For more information, visit www.rjzinc.com.