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The Case for Building Value 

January 17, 2019 at 12:00 AM
by Dunnington Consulting

In November, the Wisconsin Chapter of the Exit Planning Institute released its findings from the 2018 Wisconsin State of Owner Readiness Survey. It is the latest in a series of (EPI) studies to assess how private business owners are preparing to transition their businesses upon retirement. The results echo other studies done on a national basis since 2013. Put succinctly, business owners have a tremendous opportunity to act and improve their personal outcomes. (yikes, what an understatement!) 

The profile of the 285 owners that took this latest survey includes:

• Over the age of 53 (65 percent)
• Male (70 percent)
• First generation ownership (67 percent, with 62 percent of the companies having been started from scratch by the owner)
• Running a small, family business (58 percent less than $5 million in revenue; 24 percent with between $5 and $25 million in revenue)

As a group, the owners overwhelmingly acknowledge, “having a business transition plan is important both for my future and the future of my business” — 93 percent agreed with that statement. This statistic alone provides a reason for optimism.

However, the optimism quickly deflates on further review of the findings. For example:

• 83 percent of the business owners have not written an organized business transition plan. • 43 percent have done no planning at all.
• Almost half (46 percent) want to be out of the business in the next five years.
• Three quarters (76 percent) want to be out in the next 10 years.
• 82 percent responded that it would be helpful to them if the company remained profitable after they left it for their transition plan to be successful. Over half said it was “critical,” presumably because they understand that they may be providing seller-financing or subject to an earn-out provision.
• 74 percent have done little to nothing to educate themselves on what is involved or needed to have a successful transition, such as what the alternatives are, what the process is, what factors to consider, how long it really takes, and so on.

Now, not surprisingly given this, here are some actual business succession realities:

Many business owners have their wealth tied up in their business, because they invested their earnings back into the business along the way, and lack other savings. So they must monetize their business’ value in some fashion to fund the future.

Virtually all of them overestimate their business’ value (rather normal).

84% of owners must increase their business’ value in order to attract viable buyers but virtually all wait too long to discover this, take stock, prepare and plan.

It can take a year to find a buyer and sell a business. Prior to that, a rule of thumb is to allow a year of preparation for every decade of operation.

The lack of planning and preparation (or the last minute, too-little-too-late scramble) is risky because the sale of a business is very likely the single largest financial, and personal change event people ever experience. What you don’t know or don’t do can literally cost a fortune.

Some facts from EPI are sobering:

Only 2 of 10 businesses that come to market actually sell

Only 3 of 10 family business first generation successions work and last

75% of owners report being unhappy within a year of transition

Beyond avoiding these, here are some very good reasons to get smart, get a plan in place and get started:

  • Virtually every company has the potential to significantly improve its value. Cases of moving multiples from 3 to more than 10 are widespread.
  • The things that build value – that buyers care about - are the same things that build scalable, sustainable companies.
  • Building value often changes the owner’s role from “hands on and heads down” to “hands off and heads up” … bringing them more independence, time and financial freedom, capacity to move the company forward.
  • Like saving money, the sooner you start building value – and the better you are at it – the more you can gain, the sooner you can gain it and the more evidence you’ll have to claim a premium price when you decide to sell.
  • Being ready to sell gives you more ability to handle unforeseen problems (eg health challenges) or exploit opportunities (an unexpected strategic buyer)
  • With practice, building value develops people - and an organization’s capacity to change and improve – a key competitive capacity that’s hard to copy
  • Last year’s legislative changes created a continuing tax windfall that’s available to fund improvements that drive value (many are self-funding) so you can stay cash positive.
  • Looking ahead, the business climate is on the cusp of turning down, evidenced by increased stock market volatility and a flattening yield curve. As that happens, there will be less capital available to buyers and more businesses looking to sell. The perfect storm to depress buying patterns, prices and timing. And a great reason to be sure you stand out as a top value company. 

What To Do

1) Read Traction (Wickman) and Built to Sell (Warrilow)

2) Browse for info and tools

3) Get a valuation, get a plan, get started 

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