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Succession Planning: Why NOW Is the Time

Succession Planning: Why NOW Is the Time

Oct 30, 2017

Most business owners recognize the need to plan for succession; however, very few have a written plan. A recent study of baby boomer business owners showed 96 percent of them thought an exit strategy was important, yet only 13 percent had a formal plan in place.1 Given that many owners have 80 to 90 percent of their financial retirement assets in their businesses,2 that’s more than a little concerning!

Clearly, plenty of current business owners are not fully prepared to transition their companies. As boomers retire at a rate of nearly 9,000 each day, successfully selling or transferring a business requires a highly proactive approach. And there’s no better time than now to plan for it! Consider the current landscape:

  • Owners are holding onto their businesses longer than previous generations, creating pent-up demand.3
  • Despite that demand, 4.5 million entities will transition in the next 10 years, but only 20 to 30 percent that go to market will end up selling.4
  • For small business owners, an estimated $3 trillion in potential value will be left on the table as a result of owners’ failure to plan their business exit.5

Succession planning prepares you and your business for transition—whether that transition is calculated and intended, like retirement, or sudden, like an unexpected illness or even death. Good planning not only ensures a more comfortable retirement, but also can enhance the continued success of the business by helping the management team or next generation take over. Planning can also simply ensure the owner gets the results he or she wants from the future transition.

Naturally, timing is important for a sale, and the best timing is not when an owner is ready to retire! It can take between a year and five years to create and implement a successful succession plan, sometimes longer. Owners who sell just when they’re on the brink of retirement risk losing leverage and value.

Likewise, the best price is not what an owner believes the business is worth. In truth, the business is worth as much as the marketplace is willing to pay.

Here are several reasons business owners may not be able to sell when they want for the price they want:

  • Supply and demand. More businesses for sale in the marketplace means less demand. It also creates downward pressure on value. While the current M&A market is generally considered a buyer’s market because of high buyer demand, this is not true for all markets and sizes of businesses.
  • There’s no interest from the next generation. In 2016, only 52 percent of owners said they would pass their business on to family. This compares to 76 percent just four years prior. Fewer children want to do what their parents did and take over the family business.
  • There aren’t any buyers. As it becomes easier to start one’s own business, individuals may prefer to do just that versus buying an existing business. Again, this isn’t the case for all markets, but it is true for some.

Finally, many owners have unrealistic ideas about the value of their companies, a big obstacle to a successful sale.

Defining Value

Value is important in every transition, and many owners overestimate the value of their business. Some of the many misconceptions owners have about value include:

  1. “Value is just about applying a multiple.”
  2. “Value is what I want to get for the business.”
  3. “What I put into the business is what I should be able to get out of it.”
  4. “The price includes assuming the business’s debt.”

When calculating a value for their business, working with someone with experience in valuing business is important. Common issues in arriving at a realistic value could include using the wrong multiple on the wrong earnings (EBITDA), assuming the multiples are the same for every transaction or industry, estimating unrealistic future earnings, or not understanding what assets and liabilities are normally included in a purchase.

Owners also don’t typically factor in the taxes they would owe on a sale when determining what their retirement nest egg needs to be in order to realize the after-tax income needed to support their retirement lifestyle. As a result, the price a buyer is willing to pay may not be enough to support that lifestyle.

To be sure, determining value should take the seller’s business objectives into account and also the seller’s personal needs. But value is also colored by the depth of the buyer pool, the timing of the transition, and “finance-ability.” Arriving at value can further validate direction of the sale, whether that’s an internal or external sale.

Now Is the Time

Clearly value impacts planning…and planning impacts value. Delaying only reduces your options. The sooner you begin to plan, the better you can close the gap between any current realities and your desires to obtain the greatest value for your hard work and protect your legacy.


 

 

[1]Vistage International survey.
[2]“Study Shows Why Many Business Owners Can’t Sell When They Want To,” February 5, 2017, Forbes.
[3]Ibid.
[4]Ibid.
[5]“When It's Time To Sell Your Business, Will You Get What You Deserve?” April 29, 2015, Forbes.

Author(s)

Lisa Cribben
Lisa M. Cribben, CPA/ABV, ASA, CMA
Partner
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