For many business owners, between 70% and 80% of their wealth is invested in their business. Research also shows that just 20% to 30% of businesses that go to market actually sell. That leaves 80% of business owners with limited options to monetize the value of their business and wealth for future financial security.
The Tampa Bay Business Journal’s recent article entitled “Selling a family business: Plan to maximize value and preserve wealth” explains that there are several factors facing Boomer business owners, as they consider selling their businesses:
- They may be worried about forfeiting their income stream.
- They may feel trapped because the business funds a certain lifestyle.
- They could be worried about what they’ll do in the next chapter of life after leaving.
- They may not have a sense of urgency or plan for an unexpected life event, such as an illness or death; and
- They could be misinformed about options for a strategic exit to capitalize on the business’ value.
It’s critical to start business exit planning now.
It’s not uncommon that when businesses are passed on from one generation to the next, family conflicts can occur. With about three-quarters (70%) of family businesses failing after being passed to the next generation, there’s good reason to reconsider leaving your business to your children in the traditional sense.
More business owner children either can’t afford to buy the family business or would prefer to not be saddled with it. In fact, UBS Global Wealth Management found that 82% of the next generation would prefer the money from the sale of the business. Half of family business owners also don’t know their exit options and have no transition team or transition plan.
About half of all exits from a family business aren’t voluntary. The five Ds — death, disabilities, divorce, distress, and disagreements — can derail a sound business exit strategy. Instead of holding on too long and focusing on just income generation, business owners should look at growing the enterprise value of the business, thus making it more attractive and transferrable to new ownership.
You should aim to exit your business when it’s at peak enterprise value and while you have control to depart on your terms.
Simply gifting a family business to the next generation may not be the right decision. Ask an experienced estate planning attorney about other options to consider.
Reference: Tampa Bay Business Journal (Nov. 29, 2021) “Selling a family business: Plan to maximize value and preserve wealth”