There are nearly 28 million privately held businesses in the United States with an approximate value of $15 trillion. Baby Boomers, those born between 1946 and 1964, are estimated to own two-thirds of these businesses. With the Exit Planning Institute (EPI) reporting that 76% of these business owners intend to transition in the next 10 years, there has never been a better time to start planning for a successful exit strategy. What do we mean when we refer to exit planning? Selling the business? Transitioning the business to children or employees? Estate planning? Tax planning? Financial planning? The answer is all of these.
It’s easy to focus on the end game here, but in reality, business owners are woefully unprepared for what comes next. According to the EPI, 40% have no plans in place to cover a triggering event such as illness, death or a forced exit; and historical data show that family businesses only have a 30% success rate through the second generation, declining even further in subsequent generations. It is, therefore, essential to instill an “owner-thinking” mindset in your successors throughout the day-to-day running of the business. This is what it takes to have a successful exit.
Why does value matter?
Most lower to middle market businesses have primarily focused their attention on becoming “lifestyle” businesses, generating a nice income for the owner and a comfortable life. However, focusing on income does not mean that the business has transferable market value and this is where a change in perspective is needed. Value, not income, should be the ultimate goal of your business and decisions such as hiring new employees, investing in new technology and buying new equipment should always be preceded by asking “what value does this add to my company?”
Although 56% of business owners feel that they have a good idea of what their business is worth, only 18% have had a valuation performed in the last two years. When business value is the baseline for your company’s transferable success, a business valuation should become a mainstay of your business planning and completed at least annually. Your goals as a business owner should be focused on identifying, protecting, building, managing and harvesting this value to ensure the long-term success of the company once you have left.
Knowing your numbers (balance sheet, income statement, EBITDA and recasted EBITDA) and preparing a solid exit plan ahead of time will help to make your transition smoother for all involved. But you don’t have to do this alone. Contact our team today and schedule a consultation to begin your business valuation as part of your succession planning strategy.