A recent study shows that many Canadian small and mid-sized business owners who plan to leave their businesses within the next five years are not making the best moves to realize the highest possible return. The Coming Wave of Business Transitions in Canada report put out by the Business Development Bank of Canada (BDC) in conjunction with Nielsen asked over 2,500 Canadian business owners about their succession plans, and it found that of the owners who plan to leave their companies within the next few years:
- 71% are reluctant to take risks to improve their business's performance.
- 52% have little interest in expanding their business.
- More than 50% intend to sell or transfer their business to someone outside their family.
- Only 25% of them are planning to transfer ownership to family members.
- 20% or more plan to liquidate their businesses when the owners move on to their next phase of life.
Translation: Many owners are leaving money on the table by not increasing business values before they exit. The study goes on to point out that many of these owners are underestimating the time needed to complete the transition to new owners and management and sell at the optimal price. Close to 60% of Canada’s small and mid-sized business owners are aged 50 or older, and four out of 10 of the surveyed owners say they are likely to leave their businesses within the next five years. Similarly, the median American small business owner is a bit over 50 years old, and according to various reports, at least 50% of these owners have done no transition planning at all and approximately 80% have no formal written plans. So even though this report is about Canadian business owners, the lack of preparedness for an ownership transition is a trend we are seeing here in the U.S. as well.
“As for a homeowner putting a house up for sale, entrepreneurs want to realize the highest possible return on selling their business, most often their biggest retirement asset,” said Pierre Cléroux, Chief Economist at BDC. “Our study points out that by not properly preparing and improving company performance, some Canadian entrepreneurs are leaving money on the table.”
Why Increasing Business Value Matters
We talk a lot about increasing business value because it is one of the fundamental components of achieving a successful sale of your business. Owners often have 70% to90% of their net worth tied up in their private company ownership, which means that most are highly dependent on the sale of the business to provide the cash they need for retirement. The majority of owners will have to boost the value of their businesses before they transition out or they will not net enough money, after taxes and fees, to fund the rest of their lives.
In our experience working with exiting business owners, we find that many owners are not proactively investing the time and resources to increase business value and they are frequently making financial and operational mistakes that are decreasing business value. We discuss this in a recent post for Axial Forum, Your Company Probably Isn’t Worth What You Think It Is (and How to Change That).
We advise all owners to perform a detailed review of their businesses well in advance of considering any type of exit plan. This exercise will uncover items that need to be addressed long before an internal or external buyer’s scrutiny (due diligence) begins, and it can provide you with the opportunity to shore up any weaknesses that may be decreasing the value of your business.
The BDC study includes some great tips for enhancing the value of your business, including:
- Investing and improving right up to the sale.
- Boosting your profits.
- Keeping detailed and reliable financial reports.
- Making your business stand out from the crowd.
The BDC report’s message is clear: Owners are losing money by not improving their businesses and increasing value before they transfer the ownership to others. While this type of planning “is not easy, and requires more time and more resources than most business owners might expect,” it’s worth it in long run.
It’s Time to Get Your Reward
If asked, most business owners would probably say that it’s their goal to sell or transfer their business for its full value so they can fund their retirement. But the reality is that many owners are not taking the necessary, critical steps to plan for a successful transition. Many are unsure how much money they actually need and what steps they should take to increase business value. Carefully considering all of your exit planning options and creating a Business Ownership Transition Plan will help inform you about the important steps you can take to prepare for the most important transaction of your life.
As a business owner, you’ve spent countless hours and innumerable resources structuring and negotiating deals, developing innovative products and services, and working to serve your customers – now it’s time for YOU to benefit by making your ownership transition your best and most successful deal yet!