What Your Birth Certificate Says About Your Exit Plan

In our experience, your age has a big effect on your attitude towards your business and how you feel about one day getting out. Here's what we have found:

Business owners between 25 and 46 years old

Twenty- and thirty-something business owners grew up in an age where job security did not exist. They watched as their parents got downsized or packaged off into early retirement, and that caused a somewhat jaded attitude towards the role of a business in society. Business owners in their 20's and 30's generally see their companies as means to an end and most expect to sell in the next five to ten years. Similar to their employed classmates who have a new job every three to five years; business owners in this age group often expect to start a few companies in their lifetime.

Business owners between 47 and 65 years old

Baby Boomers came of age in a time where the social contract between company and employee was sacrosanct. An employee agreed to be loyal to the company, and in return, the company agreed to provide a decent living and a pension for a few golden years.

Many of the business owners we speak with in this generation think of their company as more than a profit center. They see their business as part of a community and, by extension, themselves as a community leader. To many boomers, the idea of selling their company feels like selling out their employees and their community, which is why so many CEO's in their fifties and sixties are torn. They know they need to sell to fund their retirement, but they agonize over where that will leave their loyal employees.

Business owners who are 65+

Older business owners grew up in a time when hobbies were impractical or discouraged. You went to work while your wife tended to the kids (today, more than half of businesses are started by women, but those were different times), you ate dinner, you watched the news and you went to bed.

With few hobbies and nothing other than work to define them, business owners in their late sixties, seventies and eighties feel lost without their business, which is why so many refuse to sell or experience depression after they do.

Of course, there will always be exceptions to general rules of thumb but we have found that - more than your industry, nationality, marital status or educational background - your birth certificate defines your exit plan.

Timing your Business Exit: What factors do you control?

  The Trusted Advisor        January 2014        

What are some of the factors that will affect your business transition?

Do you have control over any of those factors?

What should you do about those factors over which you do exert some level of control?

Despite popular opinion, there are few things we actually have control over in our business lives. In fact, many of the factors that influence the value of a business and success of a transition are out of our control.

This issue of the Transition Advisor will focus on the reality, or illusion, of control most owners can exert on their business value and their business transition. We will explore the following topics and our control over them:

·         Macro and Micro economic trends

·         The Age Wave - Demographics

·         Supply / Demand and available Capital

·         Specific Business issues

·         Personal Issues

Timing

First let’s visit the timing issue. Talk with any investment advisor worth their salt and they will admit; timing the stock market is at best, very difficult and, at worst, practically impossible.  Why do business owners think they can time their business transition given 99.9% of professional money managers are unable to time the stock market with any degree of consistency. The number of deals affected by the 2008 financial crisis is a grim reminder that even those attuned to economic twists and turns are not able to predict the future with any degree of accuracy. At best, business owners can only react to the timing factors affecting their business transition.

Out of Control

Macro and Micro Economic Trends

The national and local economy is definitely out of the control of the business owner. One could even question whether those charged with managing the economy show even the slightest ability to control it. The financial meltdown of 2008 reminded us that bad things can happen quickly and those owners considering an exit in that time frame have put that event off until their businesses have recovered. To a lesser extent, the local economy is beyond the influence of the typical business owner in most cases.

Demographics- The Age Wave

The Business owning Baby Boomers are reaching retirement age at a rapidly increasing rate. This tidal wave of retiring owners, some by choice and some by necessity, will result in hundreds of thousand businesses for sale at the same time. The chart below puts things into perspective:

Chart Source: Exit Planning Institute

The blue line aggregates the yellow and orange lines indicating over 500,000 businesses will be for sale between 2015 and 2020. The Age Wave will have a profound effect on the ability of owners to transition out of their businesses.

Supply / Demand and Available Capital

Hundreds of thousands of businesses for sale at the same time will result in an oversupply.  A Buyer’s Market will quickly emerge depressing business values and rendering many businesses unsaleable. Add the competition for the limited amount of capital available for business purchases from traditional sources (banks etc.) and the situation becomes even more interesting.

In Control

Good news, there are some issues that you do have a considerable amount of control over that have a significant effect on the success of your business transition.

Your Business

Of course, you do exercise a large degree of control over your business, its day to day operations and future direction. There are some steps you can take in the short term to enhance your transition options:

·         Create a contingency plan in case you, or another key person, suddenly cannot participate in the day to day operations of the business. Who is in charge of what, who can sign checks, insurance issues, buy-sell instructions etc.

·         Clean up the financials- take non-operating assets, like the sports car or vacation home, off the books. Also, get prepared financial statements from your accountant rather than just going off tax returns.

·         Standardize and Memorialize procedures etc. for the business. Repeatable processes, new product development procedures and internal SOPs give positive signals to others.

·         Make it less about you- a business that relies too heavily on the owner raises the risk associated with that venture.

·         Customer Concentration- opinions vary but, having any one customer comprise more than 25% of your gross revenues throws up red flags to potential buyers.

Personal Issues

Divorce or health related issues can force a transition but, you do exercise some control over those variables. Just as important, you need to assess your desire and energy levels available to continue to run the company. Burnout is a real problem but, a lack of energy could be age or health related. Are you bored? Don’t feel challenged by the business any longer? A yes answer to these types of questions can indicate it’s time for a transition. More on this topic in the next newsletter.

Recommendations

As this edition of our newsletter has tried to make crystal clear; many factors will affect your ability to successfully transition out of your business on to the next challenge life has to offer. Some of these factors are under your control but, many are not. The best we can hope to do is to put those things we do have control over, such as our business and personal issues, in the best condition possible in order to create the perfect storm when those factors we do not control, like the economy and demographics, come into alignment.