If you ask most business owners the question: "What keeps you awake at night?", some common answers revolve around the daily running of their business.
- Attracting skilled employees
- Employee retention
- Increasing sales/revenue
- Improved margin
- Controlling expenses
- Competition
- Etc.
These are all valid issues in the daily operations of their company, unfortunately, from a strategic perspective, what should instead be on the mind of any business owner is: "How will I harvest the value of my company?".
Some very real and sobering facts for business owners:
- Between 80-90 per cent of their personal wealth is tied up in their business.
- Over 70 per cent of the businesses put on the market to sell, do not sell. (Business Reference Guide, T. West)
- Of those businesses that do sell, 75 per cent of business owners "profoundly regretted" their decision to sell. (Price Waterhouse)
How large is this issue you ask? A recent Canadian Federation of Independent Business (CFIB) report titled "Succession Tsunami," published in 2022, reported that over 76 per cent of Canadian business owners plan to exit their business in the next 10 years. That represent a potential of $2 trillion in business assets, which, unless something is done differently, only 30 per cent of which will sell. The same CFIB report indicated that only one in 10 (9 per cent to be exact) Canadian business owners have a formal succession plan.
What will the other 70 per cent of business owners do with their personal wealth — currently tied up in their business — that they are unable to harvest?
Let's consider what is at the root of this issue. A similar study in the US, headed by Grant Thornton, in partnership with the Exit Planning Institute, titled "State of Owner Readiness" survey found the following:
- 76 per cent of owners plan to transition their business in the next 10 years, almost half within the coming five years ($25 trillion of business value).
- 83 per cent of business owners have no formal succession plan (49 per cent have nothing in place and 34 per cent have considered succession planning but have nothing documented).
- Over 60 per cent of owners don't know their exit options.
- Only 4 per cent have a life after business plan.
Both studies indicate that the root of the issue lies in the lack of planning, specifically, the lack of succession (or exit) planning.
The key elements to any business being exit-ready are like the three legs of a stool:
- Maximize the value of the business.
- Ensure the owner is personally and financially prepared.
- Ensure the owner has planned for their life after business.
Maximize Business Value
Every business owner should know the current value of their business and benchmark the value against their industry peers. A company will fall into a range of value compared with other companies in their industry. Once the baseline value is established, strategic plans can be put in place to improve where the company lies on the range of value as compared with competitors.
The key drivers to company value are in the intangibles (Human Capital, Structural Capital, Customer Capital, and Social Capital). Ultimately, these impact the multiple applied to a company with respect to its value. Focusing on these value drivers does not have to mean a business owner is solely focused on getting ready to sell their business, though a business that focuses on their intangibles and value will be ready to sell should an opportunity arise or sudden event occur.
With focused effort to improve the four intangible capital items (see above) the owner can start improving and working toward maximizing the value of the business. Another key tool is to assess the readiness of the business to exit and the attractiveness of the business from an outside party. Again, understanding the current state of the business allows the owner to benchmark and track progress as the intangible capital items improve.
Business Owner is Personally and Financially Prepared
The second leg of the stool is ensuring the owner is personally and financially prepared. This requires personal financial planning, estate planning, family discussions, considerations for key employees, community, potential charitable giving, etc. This step is extremely important and highly personal to each owner. In many cases, some of these considerations actually trump the pure "net proceeds" expectation of a business sale/transition.
Owner Life After Business Plan
The third leg of the stool is connected to the second leg. What does the owner plan to do after their business exit? This will determine what their personal financial plan needs to generate to support their business exit/transition.
All three legs of the stool require equal attention in order for the business owner to plan for their eventual business exit and value harvest of their largest asset: their business.
It generally takes two to three years to plan and execute on this type of formal exit planning, involving many deep conversations with the business owner and several professionals to assist in their fulsome plan preparation and execution. The potential to improve a company's value by 200%+ by focusing on these steps represents a significant financial impact to the owner.
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So, what should instead be keeping business owners up at night is this question:
"Do I have a documented business exit strategy that takes into account my personal financial plan and life after work plan?"
If the answer is no, you risk becoming among the 70 per cent of business owners who are unsuccessful in their attempt to sell/transition their business and, as a result, won’t harvest the value of their single largest asset — what they’ve poured their life's work into.
A particular adage comes to mind: “If you fail to plan, you are planning to fail.”
Yet, even answering no to the above, you can still make a change and start to work on your formal exit/transition strategy. It’s never too late to prepare for a sale and look toward the harvesting of the value of your business.
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Stephen Slauenwhite has 35 years of business experience ranging from executive roles during his 25 years with Royal Bank, 10 years as the Chief Financial Officer with a large manufacturing company and today he works with numerous CFO's on his team providing fractional CFO services to clients across Atlantic Canada. Stephen holds an Executive MBA from St. Mary's University in Halifax, NS, he is an accredited CPA, CMA professional accountant and is a Certified Exit Planning Advisor (CEPA).
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