This column is aimed at business owners. Consider Joe Brown. He owns a closely held enterprise, a productive farm. Its a sizeable spread, and he employs well-paid help. They till, plant, water, prune, weed, and fertilize. Throughout the hot summer they monitor the crop, keeping birds and pests at bay. But, wonder of all wonders, come fall Farmer Brown fails to harvest his crop! The planning, labor, nurturing...all wasted! Theres no financial return at seasons end on the time, talent and treasure expended.
This isnt a fairy tale. Failure to harvest happens every year. Roughly 70%-75% of all businesses put on the market annually do not sell. Ultimately there may be a harvest of sorts for some, but it falls well short of expectations and the financial needs of the owner and his or her family.
The oldest baby boomers turn 76 in 2022. The youngest boomer will turn 58; a mid-point boomer, 67. Consider the vast number of boomer-owned firms. Eventually every business will transition. The transition may be planned. It may be unplanned, precipitated by one or more of the 5Ds death, disability, divorce, disagreement, distress. A sole owner or key owner may retire, voluntarily or involuntarily. Some owners assert, I will never retire. You WILL retire. You may go out the door on a gurney, but you will retire!
The pandemic has spurred a jump in retirements as nose-to-the-grindstone owners and workers reassess meaning and purpose. We are about to witness a cascade of owners attempting to harvest the fruits of longtime labors.
Citing a 2016 Exit Planning Institute survey of middle market business owners, 63% of private businesses are owned by boomers. The business often represents 80%-90% of their net worth. Outside of a residence, vacation home and 401(K), little may rest in investments external to the business. To what extent does your financial independence and that of your family post-transition depend on harvesting a given inflation-adjusted value from your business?
Thats a critical question considering that 76% of owners plan to transition within 10 years, yet most have no solid plan. Consider how fast the last decade raced by. How much time do you really have to evaluate your business, determine the future value needed to secure your envisioned future, and take steps to grow a transferable, harvestable enterprise value that meets your goals?
Many business owners want to transfer their business to a family member. Families are complicated! Is the family business part of a larger family enterprise? How do you deal with family members who will not join the business? How do you know if the designated family member really wants to enter the business, or is suited for the envisioned role? Success beyond the second or third generation is rare. How will a family member as successor impact loyal and key non-family employees? Will they leave the business? Of owners who want to exercise an intergenerational transfer, fewer than 30% do so.
Developing a short- and long-term business continuity and succession strategy simply is good business. The heart of a strategic continuity plan is a Value Acceleration Methodology. Step One is to Indentify Current Value. Evaluating a number of factors produces a range of value estimate. You may or may not need a formal valuation initially. The real value is what a fully informed buyer would pay for your business.
Step Two is to Protect Value, a de-risking strategy. What are the risks to value? What risks can be insured? What risks can be managed, minimized, or eliminated?
Step Three is to Build Value. Theres a big difference in the value of a lifestyle business and a transferable enterprise. Owner dependence is a huge detriment to value, a hard reality for a typical in charge owner. Transferable human capital value is important. Yet, many entrepreneurs went into business because they were not administrative types. They did not set out to manage people, but as a business grows, team development and employee on-boarding, retention, and engagement becomes a key component of transferable value.
Step Four is to Harvest Value. Do you know what all of your options are? Most dont. What are the pros and cons of an intergenerational transfer, management buyout, sale to existing partners, qualified Employee Stock Ownership Plan (ESOP), non-qualified employee stock ownership plan, sale to a third party, recapitalization, or orderly liquidation?
Step Five, Manage Value. Many transition plans do not involve 100% cash up front. You may have an earn-out or other factors that impact payments over time relative to the sustainable value of the business after the initial transfer of full or partial ownership. Whats your post-sale value sustainability and growth plan?
One year after a sale or transfer, over 70% of former owners have regrets. Theyre bored! You can only travel so much, play so much golf. Your children and grandchildren love you but theyre busy. Your spouse may not be accustomed to you being home all the time! Whats your after-harvest plan to sustain purpose, meaning, passion, and engagement with life? Whats your plan to sustain physical as well as fiscal fitness?
Lewis Walker, CFP, is a financial life planning strategist at Capital Insight Group; 770-441-3553;lewis@lewwalker.com. Securities & advisory services offered through The Strategic Financial Alliance, Inc. (SFA). Lewis is a registered representative and investment adviser representative of SFA, otherwise unaffiliated with Capital Insight Group. Hes a Gallup Certified Clifton Strengths Coach and Certified Exit Planning Advisor.
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Opinion: A tale for the closely held business owner: a failure to harvest - Appen Media
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