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What We Can Learn About the State of Owner Readiness

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Key Takeaways

  • The 2013 (and 2016) State of Owner Readiness indicated that by numerous metrics many business owners have not adequately planned their business exit.
  • Comprehensive and holistic exit planning has many moving parts that requires a dedicated exit advisory team.
  • Exit planning is a process not an event.


The State of Owner Readiness Report (2013 and 2016)

In 2013, the Exit Planning Institute (“EPI”) in collaboration with PNC Bank in Ohio conducted the first State of Owner Readiness Report. The purpose of the research was to determine to what degree small and medium business owners in the Ohio area were ready to transition their businesses and what characteristics such businesses may have. The original survey was completed in 2013 with an additional update in 2016 for the Ohio area. Each year, new studies in various regions across the US have been conducted and, in general, the findings in each of the reports are similar. Our focus here will be on the 2016 update since it was the most recent one conducted by EPI headquarters, which is based in Cleveland, Ohio. I am not aware of any similar studies performed in the Canadian market but think that many of the observations found here will be analogous to our market up north.

Peter Christman, the original founder of the Exit Planning Institute and the author of the $10 Trillion Opportunity, estimated that the Baby Boomer businesses in the US accounted for 4.5 million businesses representing $1 trillion in overall wealth. Of those owners who participated in the 2016 survey, 34% were over the age of 60 and 74% were over the age of 50. Of the businesses involved, 87% were either lower middle market businesses or main street businesses with revenues of $25 million or less. Only 5% would involve businesses with revenues greater than $100 million. In general, businesses represented a broad spectrum of the economy.

Some key findings in the survey are summarized below.

  • 15% of companies surveyed were run by the second generation or later.
  • Only 15% of companies surveyed have a formal and engaged Board of Directors.
  • Only 24% of owners replied they were aware of their exit options. The remaining owners had not planned out their exit options.
  • Only 5% of respondents had definitively assembled a transition team, while another 7% considered the Board to be that team, leaving 88% of business with no team at all.
  • Only 14% had completed any form of business training with respect to exit planning.
  • 50% of respondents were not sure how they were going to transition (either internally or externally).
  • Nearly 50% of respondents had given no thoughts to after-business exit planning while only 5% had performed any formal work in this area.
  • Only one-third of owners had definitive contingency plans in place.


Lessons To Be Learned from the Survey

The 2016 survey, much like the original one in 2013, gives us insight into a number of areas. These represent opportunities for advisors to assist SME owners with education, planning and implementation. For owners, it is an opportunity to re-assess their priorities and educate themselves on how best to harvest value from their business. Below are some areas in which both owners and advisors can help reduce both their education and value gaps.

1)    Consider your Exit Options

There are numerous exit options but not every option is appropriate for every owner. Despite the popularity of third party exits, the survey indicated that internal exits were considered more by the respondents. Internal exits often involve family transitions but can also include management/employee buyouts and employee stock option programs (ESOPs). If multiple shareholders are involved initially, an existing shareholder can have their shares purchased by one or all of the other shareholders. Less known external options include private equity purchases, private equity recapitalizations, and distress investors. While often the last resort, an orderly liquidation might also be a consideration especially in challenging economic times. Once you have considered your exit options, and the pros and cons of each, a more definitive plan can be put together.

2)    Assemble an Advisory Team

Business owners need to consider who their most trusted advisors are and assemble a team that will consider their bests interest. This team may include a commercial lawyer, banker, accountant, business coach, valuation analyst, financial and wealth manager, and an exit planner. Also, consideration can be given to family members and industry peers. The role of the team to assist in a holistic and comprehensive manner in devising and assisting with the execution of a successful exit. No one person can successfully play every role, so exits are optimized when the advisory team works with a collective voice with the best interests of the owner in mind.

3)    Incorporate Life-After-Exit Planning

Understanding what you as an owner will do after the exit is complete can be just as important as getting to that final stage. Studies have shown that the majority of business owners regret their sale after it has been completed. For many, this is because no thought has been given to life after an exit. For many owners, that business was their life and purpose and with them now no longer controlling the destiny of that business that they may have spent a lifetime building, psychological factors weigh heavy upon them. This is a situation, however, that can be avoided by incorporating life-after-exit planning into a holistic and comprehensive plan. This may include finding other worthwhile pursuits in retirement such as philanthropy, consulting, investing in other businesses. In addition, some exits can include plans for the current owner to play a role either as a minority shareholder or on a consultation basis.

4)    It’s a Family Affair

For many businesses, family are an integral consideration in the exit planning since regardless of their level of involvement in the business operations, they will be positively impacted by a successful exit (and inversely, negatively by an unsuccessful one). Family involvement also blurs the lines between business, personal, and family matters but with potentially multiple stakeholders involved, owners must consider non-financial outcomes such as the impact on family members when preparing their exit plan.

5)    Exit Planning is a Process not an Event

Exit planning takes time (years in fact) but the results can be worth it through the impact of an exit plan that considers best options moving forward that have adequately considered both financial, business, and personal considerations. Given all the complexities of transitioning a business, an owner should consider a minimum time frame of three to five years to adequately plan their exit and earlier consideration may be warranted if growth is a high priority for you.