Reason 1: Concentration of Wealth
A typical business owner has 70-80% of their wealth tied up in their business. That’s a lot of eggs to carry in one basket. On top of that, private businesses are less liquid and more risky than stocks, bonds and real estate investments.
Fortunately owners can control the value and sell-ability of their businesses. Now, whether they exercise that control is another matter!
Reason 2: Many Sales Are Unplanned
Over the years, studies have indicated that as many as 50% of all business sales are involuntary. The cause may be personal in nature (death, disability, divorce, etc.), or related to a change in business or market conditions. If that 50% statistic is close to accurate, owners should make their businesses ready to sell and attractive to investors at all times. Definitely as they approach retirement age.
So, how sale-ready are most businesses?
In the Q1 2019 Market Pulse Survey of U.S. business brokers and M&A advisors by the Pepperdine Capital Markets Project of Pepperdine University, the consensus was that 70% of businesses are unsellable. These same professional intermediaries also estimated that 48% of businesses on the market won’t sell. Now that’s a sobering statistic.
The quarterly Market Pulse Survey looks at businesses in the range of $500,000 to $50 million in enterprise value. Generally, larger businesses are more sell-able. This size effect has always been there, but in my experience it has become even more pronounced since the 2009-2010 recession.
Are business owners planning ahead?
The intermediaries surveyed by Pepperdine in Q2 2019 indicated that most business owners conducted no formal planning prior to engaging a broker/advisor. Lower middle market business owners ($5-50 million enterprise value) were more proactive, though still roughly 40% failed to plan more than a year in advance.
Why owners may be resisting exit preparation.
From my perspective, some of the more common reasons business owners put off exit preparation are their independent personalities, blindspots caused by a lack of experience and objectivity, fear of looking foolish, skepticism (too many impostors and bad actors out there), the formality of the processes that have been proposed to them, and just being too busy working in their businesses.
The best way to maximize enterprise value and increase the likelihood of a successful ownership transition is to start preparing early. Don’t leave it to chance. For more information see my recent blog titled, Failing to Plan Your Exit is Planning to Fail. Or visit this page of our website for an overview of the exit planning process.
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Al Statz is founder and president of Exit Strategies Group, a leading M&A advisory and business valuation firm with offices in California and Portland Oregon. Al can be reached at 707-781-8580 or firstname.lastname@example.org. Feel free to request a copy of the latest Market Pulse Survey.