Are you prepared to transition your business?
As I read a recent survey of Georgia business owners conducted by Vanderbilt University’s Owen Graduate School of Management, I was struck by several statistics and the implications for owners of small and medium-sized businesses. This survey, sponsored by BNY Mellon Wealth Management, VRA Partners, Arnall Golden Gregory LLP, Carr Riggs & Ingram and Adams Capital, focused on the extent to which business owners are ill-prepared to transition their businesses and to benefit from related wealth accumulation.1
According to the Exit Planning Institute (EPI), there are approximately 6 million active privately-held companies in the US.
Baby boomers (I am squarely in that category) reportedly represent over 60% of the ownership of those businesses.
About 67% of those owners plan to transition during the next decade.
According to EPI, somewhere between 80 and 90% of most business owners’ total net worth is tied up in their businesses.
OK. So these statistics may not surprise you. But read on …
Among Georgia respondents, 64% do not have a formal transition plan in place for their businesses.
A majority of respondents place a high priority on getting maximum value for their businesses, but fewer than 40% have engaged professional advisors to help them accomplish this.
These numbers are staggering (but perhaps not surprising) when you consider what is at stake.
Let’s look at this from another perspective. Baby boomers represent ownership of the equivalent of 3-1/2 million businesses in the US, with an average of 80-90% of their net worth tied up in their businesses. And of these, a large majority plan to transition over the next ten years. But a high percentage of Georgia respondents do not have a formal plan in place nor have they engaged a professional advisor to help them transition, even though they want to get maximum value for their businesses. While the survey focused on Georgia business owners, there is a likelihood that these statistics would be replicated elsewhere.
Business owners by-and-large have a clear vision as to what life after a transition would look like for them personally, but they fall woefully short of having any practical plan in place to get there. The day-to-day imperatives of running a business seem to take center stage, while long-term planning, especially as it relates to an exit strategy, gets pushed aside for another day.
Is it any wonder that so many business transitions fail to achieve their stated objectives? When long-term exit planning is an afterthought (or no thought?) at worst, or a secondary priority at best, it’s hard to see how the outcome could be anything but suboptimal. And when professional advice is not sought until late in the game, and even then the focus is often on the transaction itself rather than the underlying strategy behind the transaction, what else could we possibly expect?
And there is another dynamic at play here. Many closely-held businesses are highly dependent on the owners themselves. It stands to reason that a suboptimal transition plan for the owners often bodes poorly for the success of the business after the owner has transitioned out. This is particularly true, for example, for family businesses, where succession failures are legend. And the impact of these failures extends across the value chain, from suppliers to customers.
Let me hasten to add, as a small business owner, I believe I speak for my partners when I say that we are part of these statistics. It’s something we talk about a lot, but not something that we focus on enough. Our stock in trade is advising businesses on issues related to strategy, leadership and succession, but when it comes to our own business we tend not to practice what we preach (remember the story of the cobbler’s children having no shoes).
How about you? Are you spending the necessary time focusing on long-term business transition planning? Please drop me a line and share your thoughts.
Mike Cobb
1 Gary Rzucidio, “Georgia Business Owners: Preparing for a Future Transition”, BNY Mellon Wealth Management, February 2017