A recent nationwide survey of small business owners by Securian Financial reveals that more than 60 percent of all small business owners plan to leave their business in the next 10 years. The demographics certainly support this research with approximately two-thirds of all small businesses currently owned by baby boomers.
However, unlike previous generations, the vast majority of these owners report that the next generation has no interest in taking over the family business. This will create an enormous transfer of wealth, but a business owner will need to be well prepared to maximize the value of their business.
Preparation consists of some critical steps to ensure the owner can transfer the business when they want, to whom they want and at the value they need.
According to BEI Exit Planning Advisors, more than 90 percent of these owners have not yet initiated a plan for their exit. Delaying or failing to plan will minimize the owner’s ability to have the transfer on their terms and at their preferred value.
A little bit of planning and preparation can go a long way to securing your future. Here are some tips.
Assemble a team of transaction advisers to help you prepare the business so it can be easily transferred at maximum value. The team should include a transaction attorney who specializes in small business sales, a tax accountant who can find value on the internal financial statements and help with tax planning, a wealth manager to help you understand how much you will need to maintain your lifestyle and an M&A advisor to provide feedback on potential acquirers and market trends.
There are some standard value drivers like consistent sales and profit trends, margins, financial controls, infrastructure, client diversity and strength of management and employee development.
Then there are value drivers that may be specific to your business or industry, such as inventory management, distribution networks and material procurement. Understand the key value drivers for your business and fully vet them with your advisers to ensure they are in line with industry norms.
This can help you understand the business value as it relates to your required exit value. The report should provide you with a gap analysis and financial roadmap outlining areas for improvement.
The complexity and depth of this process should match that of your business and personal goals. A high-level review with all of your advisers, at the same time, should yield many benefits. Depending on the outcome of those discussions, you can decide how much further to research the issues and whether the effort and costs will yield an acceptable benefit.
As an alternative, you can also seek out a professional exit planner who will quarterback all of your professionals and design a roadmap that is specific to your business and goals. This is a more costly option, but can yield big dividends. Whether you do something formal or informal, the key is to plan your exit to ensure you are leaving your business on your terms.