80% of businesses with <$50 Million of revenue put on the market don’t sell according to Tom West founder of the “Business Reference Guide” a guide to pricing businesses and franchises. And if you are a family business the odds are not much better according to the Family Firm Institute. Only 30% of all first generation family-owned businesses survive to the second generation which means 70% fail to transition. The failure rate for 2nd Generation to 3rd is close to 80% and from 3rd to 4th is 97%.
With 80%-90% of every business owner’s net worth tied up in their business one would think the success rate would be much higher! Much has been written about starting a business and growing a business, much less has been written on the subject of exiting one’s business. But just as there are business strategies for starting your company and strategies for growing your company there are strategies for “Exiting” your company that can lead to a more successful outcome.
Why is this more important today? Business owners are facing a train coming down the tracks called the baby boom generation. 1.) Approximately 2/3 of all privately held businesses in the United States today are owned by Baby Boomers. 2.) The #1 reason business owners give for leaving their business is retirement. 3.) In 2015 the Exit Planning Institute survey stated that 76% of boomers planned to exit over the next 10 years. If you do the math, this equates to around 50% of all privately held businesses (with at least one employee) looking to change ownership over the next ten years. Since this survey is 3 years old, time is growing even shorter for the businessowner.
Why are business owners putting off this very important stage of their business life? It could be they see this stage as an event more than a business strategy. Another reason may be a misconception of deferred gain and immediate cost. Business owners are often deal makers and risk takers. So perception may be more like negotiating the sale of a piece of property. But transitioning from a business doesn’t work that way.
First of all a saleable business is one that is not dependent on you the owner to thrive. For anyone to want to buy it, your business has to be valuable even after you’ve left it.
There are 3 criteria important to buyers
1. It’s Teachable
You are able to teach employees or suppliers (or be able to program technology) to do most of the work. That means the delivery of your product or service can’t be dependent on you showing up.
2. It’s Valuable
To create a saleable business, you need to have something others couldn’t easily replicate.
3. It’s Repeatable
Build a recurring revenue model.
The only way to “cash in” on your most valuable asset is to transfer it to someone or some company who will pay you a premium because they have not been able to duplicate what you do or by merging your company with theirs to reach a synergistic result. (1+1 =3)
If you personally own all the customer relationships, if the talent at your company will only work for you or cannot produce without your guidance, then there is nothing to transfer. When you leave, the relationships go away too. Having a strong management team, a diverse client/customer base, well-documented systems and procedures, and a winning culture doesn’t just benefit you when you exit. A saleable business can benefit you right now. It can drive more sales and income, it can free up your time to allow you more leisure or more time working on your business rather than in your business.
Where to start? 1.) Learn the value of your business today. 2.) Learn whether you are personally and financially prepared. 3.) Be able to answer the question, “What will I do after I exit the business.”
In order to change the outcome business owners need to change their perspective on business exit planning. It is a “Process Not an Event”. It is a process built around business strategy and constitutes an important stage of the business owner’s career. By designing and executing a defined business strategy around preparing for this event as an owner you can realize greater income, greater value, and more confidence when that transition takes place because you will be prepared!