How baby boomer business owners are missing out on a $10 Trillion opportunity

“What are you going to do after this?”—A common question business owners face when approaching retirement. Familiar responses include “I haven’t had the time to think about it.”; “I plan on selling at some point in the future.”; “My CPA thinks the company is worth X.”; “My neighbor down the street sold their business for X,” or “I plan to work until I die, and then pass the business to my kids.”

After conversations with hundreds of business owners, I have found that roughly 50 percent have done little or no structured planning to sell or transfer their business. This is absurd and unfortunate considering the statistics found in “The State of Owner Readiness Research” study conducted by the Exit Planning Institute (EPI):

America’s private business owner wealth exceeds $10 trillion within 6 million privately owned operating businesses. According to EPI, 70 percent of baby boomer businesses owners would like to transition in the next 10 years. But contrarily, only 20 percent of these business owners will actually sell their companies—and to top it off—many will receive lower multiples or net proceeds than the business is worth because of inaccurate valuation and lack of credible counsel and resources.

This is a tragic missed opportunity considering 80% of business owners’ net worth is tied to the sale price of their business.

Can you spot the disconnect? This disparity may well be the most significant transfer of wealth recorded in history, poorly executed.

While these numbers are staggering, consider the massive effect on families and communities that rely on the small business owner. Inc Magazine reports, “According to the Bureau of Labor Statistics, since the end of the Great Recession, small businesses have created 62 percent of all net new private-sector jobs. Among those jobs, 66 percent were created by existing businesses, while 34 percent were generated through new establishments (adjusted for establishment closings and job losses).”

Do you suffer from transition blindness? If you can relate to the unprepared business owner, it’s time to determine if you’re ready for the transition process. Here are 10 questions to help you do so:

  1. Are you and your family educated on the business transition process?
  2. Are your business, family and personal goals defined and pointed in the same direction?
  3. Have you appointed and can name your business transition advisors?
  4. Have you written a contingency plan if an event prevents you from operating your business?
  5. Have you completed a business and personal strategic valuation within the past 12 months?
  6. Are you aware of the variety of exit strategies and how they fit in with you and your family’s goals?
  7. Have you written a transition strategy and timeline for relentless execution?
  8. Have you established a plan for life after the business sale that is supported by a wealth management plan to fund that lifestyle?
  9. Have you outlined a plan that de-risks your business and identifies value gaps with an implementation timetable to maximize the value of your business?
  10. Is there a succession plan in place so the company will continue to operate in your absence?

The majority of businesses are not prepared to sell. With a healthy economy and current abundance of capital available to buy companies, the advantage belongs to the buyer. After a lifetime of work, you may find that much of your net worth is tied to your company, it’s imperative to educate yourself and find credible counsel in preparation for transition.

The exit planning process is arguably just as crucial as a good balance sheet. Put yourself in the shoes of the potential buyer; would you buy your company today at the price you think its worth?  If your answer is not a resounding yes, then start today. Your family, employees and community will benefit, and you will too.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor. Securities Offered Through LPL Financial, Member FINRA / SIPC. Investment advice offered through RS Asset Management, a registered investment advisor and separate entity from LPL Financial.

Bob Roark is the President and co-founder of RS Asset Management, Bob Roark concentrates on offering high-quality service and independent financial advice to clients. He specializes in addressing the individual concerns of extraordinary professionals, business owners and retirees. @bobrsam

Transition stock photo by vectorfusionart/Shutterstock