North American entrepreneurs are aging even faster. According to the US and Canadian Venture Capital and Private Equity Association, over the next 8 years, more than half of the country’s medium-sized business owners are expected to retire. The entire entrepreneurial community is expected that more than 66% will need to retire in less than 8 years.
An estimated $2.7 trillion in business assets are expected to change hands over the next decade, representing the largest turnover of economic control in generations.
Most owner-operators feel that it is too early to plan for business succession. Many mid-market family business owners are underestimating the challenging issues they will have to address, the time it will take to address them, and the emotional decisions they might have to make. The majority of business owners have not even started to discuss their exit plans with their family members or business partners.
Those statistics are unfortunate, and the apparent lack of preparation could backfire on some business owners. “Succession planning should be a deliberate process and not a one-time event. Business owners should realize that the best time to plan is when you can afford the time to properly evaluate alternatives and seek input from professional advisors. Owners ideally never want to be forced to accelerate their succession planning.”
Business succession planning is an investment in the future of their company for the owners, employees, and customers. Planning is the key to future success for everyone whose efforts have helped the business to grow. The existence of a succession plan emphasizes a commitment to a company’s long-term growth and creates confidence among shareholders, lenders, employees, and suppliers.
So have you been putting off succession planning for your business? There is no time like the present to explore your options. This process will involve asking some tough questions and exploring scenarios that may not please all family members, shareholders, managers or employees.
Do you want to sell the entire company in due course? Do you want to sell some now and complete the rest of your liquidity later? Is it important to you that ownership remains with family members or managers? Do you want them to have control or just minority equity participation alongside a new owner?
Owners have various alternative options. The first step should be to have a professional business valuation firm to prepare an assessment of the value of your company. It is important for the business owner to be realistic with respect to valuation expectations, or a lot of time will be wasted. Accountants and lawyers should be involved in estate planning and tax matters.
Answering the questions posed above can be time-consuming and should not be rushed. Most owners and in fact most businesses are not ready for the sale process to begin immediately. The valuation conclusion and business review process often indicate that some issues of management depth, capital structure and profitability should be addressed before proceeding not only to support valuation expectations but also to have a more saleable business.
That is why many owners find a gradual exit less alarming than an immediate one, “If you can prudently diversify the family net worth by taking some chips off the table now, you can better plan for the sale of the rest of the company, and probably at an improved valuation. This also generally leads to a smoother transition, and gives the owner a better chance to evaluate next-generation managers, to transfer business relationships and responsibilities, and to identify and manage risks that a strategic buyer will consider down the road.”
Most family business owners don’t build their businesses by selling them as a top priority, but more should. This involves drafting a written strategic plan for the future priorities and direction of their business, and putting in place next-generation management so the business can grow and prosper without them.
Following these steps, and starting succession planning early will ensure an effective process, with due consideration given to the range of issues and emotions that family business owners usually face.
Mark Borkowski is president of Mercantile Mergers & Acquisitions Corporation. Mercantile is a mid-market M&A brokerage firm. He can be contacted at email@example.com or www.mercantilemergersacquisitions.com