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Business Owners’ Corner

Smoothly Transitioning From One Business Owner to Another

We are very excited to announce a new feature section, with our partner Metro West Business Advisors, entitled Business Owners’ Corner introduced to raise awareness and educate business owners on Business Transition Planning. — MassMEP

At some point, every owner leaves his or her business voluntarily or otherwise. In recent years, the topic of Transition Planning has grown in popularity as a result of the enormous impact it will have on millions of business owners, their businesses, their families, and the economy.

Business Transition Planning is about the transition of a business from one owner to another. It involves looking at and narrowing an owner’s preferred transition method(s). Choices may include selling to a third party, a management buyout, and, in the case of a family-owned business, transferring ownership to a family member.

Business Transition Planning is not new. Transition planning is also known as Exit Planning and Succession Planning. Transition Planning is a broader term and intended to encompass both Exit and Succession Planning. 

The term Exit Planning is quickly losing its predominant industry position to the term Transition Planning in part due to reaction to the perceived connection of the word exit with death and/or end of a life. Succession Planning is typically defined as a narrower scope of identifying a replacement for your job, not ownership transition.

The Perfect Storm of Uncertainty
So why has Business Transition Planning garnered so much attention of late? Because, what lies ahead is what many experts are calling The Perfect Storm. Consider these facts about recent conditions:

  • Studies show that for every 5 businesses listed for sale, only 1 actually sells
  • 84% of business owners are depending on proceeds of selling their business for their next phase in life
  • In a survey of 300 former business owners, 75% of the owners said they sold for much less than expected
  • For family owned businesses only 30% of family-owned businesses survive to the 2nd generation, dropping to 17% for 3rd generation

If that isn’t enough to create uncertainty for business owners let’s add a couple of trends that make the future transition environment even more sobering. Baby-boomers are heading to the exit in unprecedented numbers. Baby-boomer wealth is held in 12 million privately-owned businesses.¬†Greater than70% of these businesses are expected to change hands in the next 10 to 15 years. The number of sellers will outnumber buyers. Aside from sellers finding fewer buyers interested in their business, the glut will create a buyer’s market and downward pressure on selling prices and terms. As if that’s not enough, people are living longer requiring more money to sustain their standard of living, savings are at an all-time low, the global economy is changing at an ever increasing rate, and investment returns over the last decade have significantly eroded financial wealth leaving little time for those nearing their next phase in life to make up for the unplanned shortfall.

Less Than 10% Have a Transition Plan
What’s alarming, in light of the statistics and trends is less than 10% of business owners have a written transition plan. In fact, a lack of planning was identified as one of the largest contributors to the poor transition results noted above. Knowing business transition is such an important once-in-a-lifetime event, why are so many business owners unprepared?

When asked, business owners’ top reasons for not addressing their transition were:¬† too early, too time consuming, and other. The "other" category is the catch all for the emotional issues–issues related to fear and mortality. Owners fear letting go, loss of control, conflict (family transition), as well as losing their purpose and identity. These are big issues and all take time to address and resolve.

It’s never too early to begin planning. Transition Plans begin with the vision or dream of what a business owner wants for his/her family, his/her business and themselves. Each plan should be specific and tailored to the individual situation. Done properly the planning process considers all factors, all interested parties, and the personal goals of the owners in a manner and time period that accommodates the business, its shareholders, and potential successors and/or buyers. The planning process will identify the amount of work, effort, and an estimate of the time required to achieve a chosen outcome. It’s not unusual for implementation of a plan to take five to ten years or more. The earlier a business owner begins the planning process the greater their chances of surviving the perfect storm.

Setting Priorities for the Business
It’s not surprising business owners rank "too time consuming" high on the list of reasons for not planning. With the significance the business has in the life and livelihood of owners you would think they would make this a priority and find the time. The blame does not rest solely with owners. The Exit Planning industry has not made it easy.¬†Historically, exit planners have been experts within a particular discipline (e.g. legal, accounting, or financial), good at what they do but not positioned to provide business owners with broader, objective planning and implementation help they need. The courageous owners willing to pursue a plan have had to be their own transition planning champion, not knowing much about what should be done, where to start, or which expert to listen to. They are left struggling and frustrated trying to create and implement a plan.

More recently, Transition Planning has improved with the emergence of independent objective experts who can take much of the planning and implementation burden off an owner. Further, they can be your champion ensuring that all the specialists on your team of advisors are working together and focused on your outcome.

Next topic: A contemporary simplified approach to Transition Planning.

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