Is Your Business One of the Fortunate Third that Will Sell?

What Makes for a Business Others Want to Buy? 

Think of this, according to the Exit Planning Institutes’ (EPI) 2023 National State of the Owner Readiness Report, 75% of U.S. Small Business Owners would like to retire in the next 10 years yet, of those wishing to sell their businesses, only about one-third will be successful. If this statistic remains, only about 24% of the 4.5 million Small Businesses will successfully sell leaving more than $10.5 Trillion in unrealized value lost!

How does this happen and, more importantly, how can we fix this problem? There is a well-known axiom in the financial services industry, “Failing to Plan is Planning to Fail!” Let us look further at the EPI study to find some of the causes. Only 41% of respondents had a formal written plan for what they would do after selling their company and another 50% had an informal plan they had thought through. That is far better than the 83% who had no business plan in 2013, the last date of the national study but still 21% of those with a written financial plan in 2023 had never reviewed it after it being formulated. A financial plan is not a static document, it is a dynamic practice that must be revised over time as situations change. Imagine planning a family vacation to a new resort in what was previously a jungle, using a 20-year-old map.

We believe much of the problem can be solved using the Value Acceleration Methodology for small business owners. Like personal financial planning the Value Acceleration Methodology for Small Business Owners uses the three-legged stool analogy. For personal financial planning, the legs represent Personal Savings, Pension and Social Security. In Value Acceleration Methodology for business owners, Personal Planning, Financial Planning and Business Planning are the three legs. Let us review each of these Value Acceleration Methodology topics:

Personal Planning: This is a topic that is often given some thought to in Personal Financial Planning but is of significant importance for business owners. Why do we make this distinction? A non-business owner typically works an eight-hour day and then goes home to their family or someplace else to meet with friends to engage in social activities, sports, hobbies, and other interests. A business owner typically works twice the hours of a non-owner, and their business is their second family, hobby, interest, etc. Because 72% of business sales fail at the closing table because the current owner has no idea what they will do on the day after the closing, their “second act”, it is imperative that the owner is assisted to find those other activities outside of their business in which they can enjoy and engage. Often it may be advisable to engage the services of a lifestyle coach to assist the current owner in finding their “second act.” Of course, this is not something that is done the month prior to an impending sale but is part of the overall planning process, which we advise begin at least 5 years prior to any anticipated sale.

Personal Financial Planning: This is the space where the typical financial planner/wealth manager operates. Surprisingly, many professionals in this practice field do not delve to far into the business aspects of a business owner based on another statistic from the EPI study showing that only 30% of respondents had any estate plan. It is true that the current federal estate tax limit is $13.6 million, which would exempt a portion of small businesses but, unless legislation is passed, the current estate tax will sunset at the end of 2025, lowering the limit for estate taxes to the 2017 limit adjusted for inflation, or about $7 million. Other areas often overlooked in this space is the businesses employee and executive benefits. Not that these areas are not important, they are extremely important in a business sale, but advisors working in the Personal Financial Planning space are often only educated on these plans in a cursory manner. Often overlooked, employee and executive benefits can have substantial liability lurking below the surface that may be easily corrected once identified prior to an eventual sale but could cause a potential buyer to pass over your deal for another without the same issues.

Business Planning: The final leg of the Value Acceleration Methodology is business planning incorporating at least the following eleven key elements:

1. Written Goal and Objectives
2. Written Action Plan to achieve those goals and objectives
3. Market Attractiveness Assessment
4. Business Readiness Assessment
5. Business Risk Assessment
6. Recast Financial Statements
7. Business Valuation
8. Value Gap Analysis with value growth targets and goals
9. Value Enhancement Plan
10. Value Growth Budget
11. Exit Option Analysis

While this may seem to be a lot, it is important to understand that the value of the business is in the determination of the buyer and not the current owner. Completing the eleven steps and continually keeping them up to date demonstrates to a would-be buyer that:

1. The current business owner has spent time and money to educate themselves on the proper transition for their business.
2. The current business owner’s personal, financial, and business goals are now defined and co-dependent.
3. The business owner has assembled a formal exit planning advisory team (attorney, CPA, financial advisor, and value growth consultant)
4. The business owner has created a contingency plan to address a buy/sell agreement and appropriate insurance.
5. The business owner has completed a strategic analysis, business valuation and readiness assessment within the last year.
6. The business owner has considered all exit options and optimum deal structure available to them.
7. The business owner’s transition plan is written and well documented.
8. The business owner has created a life-after business plan (second act).
9. The business owner has active pre-transition value enhancement and preliminary due diligence enacted.
10. The business owner’s management team is aware of all the above planning elements and is prepared to operate the company after the exit of the owner.

Nothing in life is guaranteed, however, experience shows that this integrated approach to aligning the three legs of the Value Acceleration Methodology provides the foundation, the framework, and the operating system to provide the best possible outcome for a successful transition.

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Allen Bronton, AIF®, CEPA® is a highly experienced member of the Value Acceleration Methodology team as Wealth Manager, Fiduciary Employee Benefits Advisor and Executive Benefits Consultant.

For further information, Allen Bronton can be reached at (844) 372-5900 | Clearfinancialstrategies.com

Investment advice offered through IFP Advisors, LLC, dba Independent Financial Partners (IFP), a Registered Investment Advisor. IFP and Clear Financial Strategies are not affiliated.