Wealth Management News & Resources
Recent studies by the Exit Planning Institute (EPI) show that 66% of the current American business market is owned by Baby Boomers, who are set to transition their businesses to new owners over the next zero to ten years.(1) According to the folks at the EPI that represents approximately $10 Trillion in business value.(1)
Their statistics also show that only 20%-30% of businesses that go to market actually sell (whether that is in the form of an internal sale to employees or next generation, or if that sale is to an external party).(1) That leaves up to 80% of those without solid options to harvest their wealth and ensure economic continuity for their own retirement, their heirs or their philanthropic desires.
An owner who is “ready” with an attractive business greatly increases the odds the business will survive a transition. The question is, how ready are business owners?
Here at Eckhoff, we specialize in helping the principals of mid-sized businesses optimize the value of their business and prepare both the owner and the business for a successful transition, internally or externally.
Part of our client-focused process in helping business owners is to have them answer a series of questions to determine their readiness for a transition. It’s our first step in a disciplined process.
But, a frequent and obvious question is “what does ‘ready’ mean; how do we define ‘ready’?” That seemed like a simple and obvious question that deserved an answer. So the folks at EPI put together a set of 10 simple statements to help owners determine what they need to accomplish to be prepared or “ready” to transition their businesses.
Use this simple checklist and see how many check marks you have at the end:
You have spent some time and money getting educated on the process of how to transition your business. You have discussed transitioning with your loved ones.
Your personal, financial and business goals are aligned meaning they are defined, co-dependent, and linked.
You have created an advisory team which includes at a minimum: an attorney, CPA, wealth or financial advisor, exit advisor, and spouse, partner or other family member who is a “significant other” in your life. Other advisors that may be included: personal friends and advisors, banking advisor, merger and acquisition attorney, estate planning attorney, real estate attorney, business attorney, Employee Stock Ownership Plan (ESOP) specialist, tax specialist, insurance specialist, foundation / charity, key employees, investment banker or business broker, board members, family or personal counselor.
You have created a contingency plan which should include buy-sell instructions, appropriate insurance, and specifies what should happen if before you transition something was to happen outside of your control that would prevent you from operating your business or unwillingly force you to transition. You have reviewed this plan with your trusted advisors including family members and/or partners if applicable.
You have completed a strategic analysis, business valuation and personal, financial and business assessment(s) within the last year.
You have considered of all your exit options and optimum deal structure and weighed the pros and cons of each in relation to your stated goals and objectives.
Your transition plan is written and includes goals and objectives, clearly defined tasks and accountabilities, the definition of your transition team, the definition of your transition process, a plan leader or project manager, timelines, a budget, and your role before and after the transition. This plan ideally has a multi-year implementation timeline.
You have considered and designed a post business life-after plan. This plan is linked to or part of your wealth management plan which has been prepared by a professional financial advisor and if applicable, estate planning attorney, insurance specialist, tax specialist and charitable foundation specialist.
You have a pre-transition value enhancement / preliminary due diligence project underway to de-risk the business, maximize its value, minimize taxes upon transition and improve the probability of a smooth transition to the next owner including family, partners, or employees if applicable. Family transitions should be treated no differently than other transition options. This plan ideally has a multi-year implementation timeline.
You have a management program underway to ensure the post-transition leadership is prepared to operate the company after you exit and secured the appropriate specialists to handle your desired transition option.
How many check marks do you have?
If you have 7 or more check marks you are well on your way to being prepared to optimize value and have a successful transition.
If you have less than 7 check marks then we have some work to do to help you get ready.
Sometimes an owner has the time and capacity to go through a 3-5 year process to prepare the business while other times we have to do our best given the owner’s circumstances. Either way, we help develop a plan that makes sense for your situation and then lead the process to actually make it happen.
But it’s not all numbers.
The preparation has to also be personal. Is the owner psychologically ready to let go? Quite often this is the biggest hurdle for owners to get over. This can be the biggest source of seller’s remorse post-sale.
(No, we are not therapists, although based on the questions we ask and the guidance we provide, we are asked this frequently.)
Exit planning is an art and science. We must work with the owners and family on qualitative issues just as much as quantitative issues or we are not fully helping our client-owner.
Bruce Frankel is a Certified Exit Planning Advisor (CEPA®) and member of the Exit Planning Institute. You can learn more about Bruce here.
(1) Northeast Ohio Chapter of the Exit Planning Institute. (2013). “State of Owner Readiness” Survey. Exit Planning Institute.
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