The surveys of family businesses conducted recently across North America report that approximately 40 percent of entrepreneurs expect to exit their business in the next five years, and a whopping 70 percent within the next ten years. These statistics are a direct result of the aging baby-boomer business owners nearing or reaching retirement age.
However, a significant number of these business owners indicate they will be relying on the ongoing success of their business to finance their future lifestyle – either through the proceeds of a sale of the business, or from collecting a salary or dividend after they exit the day-to-day management of the company.
Are you one of them? If so, do you have a plan in place that will increase the value of your business before it's time to sell? Are you proactively preparing a successor who will enable the continuity of the company? Or are you one of the 65 percent of these entrepreneurs who haven't planned that far ahead?
Among the 35 percent who report they have a plan in place, the majority indicates that their approach is either very casual or addresses only the technical aspects of a business transition such as managing the tax implications or the legal transfer of ownership. Very few are focused on the intangible side that includes defining the long-term vision and sustainability of the business, and the process for selecting and grooming the next generation of leadership.
So why have so few business owners developed an integrated transition plan? Let's examine the reasons.
Why SMEs don't plan
While there have been many studies on why SMEs (small to medium-sized enterprises) don't plan, a CFIB survey highlights the following concerns and issues facing today's business owners.
Too early to plan for succession
At the top of the list for 60 percent of the participants of the survey is the belief that there will be plenty of time later to address the transition of the business.
Unfortunately, these entrepreneurs don't realize that transition planning requires a much more structured and formal approach than many other types of business planning due to the considerably longer time required to prepare for, and execute, the transfer.
To realize its maximum value, your business must be able to operate without your involvement and it can take many years to reach that stage. Why settle for less than optimum value when a little planning can result in a much better sale?
Similarly, if you plan to transition the business to a family member or someone within the company, it will take considerable time to groom a successor to take over. So even if your planned exit from the business is ten or more years hence, it is wise to start the process now.
Another potential issue is an unplanned exit from the business. Even though you don't expect any disaster to strike, you would no doubt want to ensure your family and business are protected should tragedy occur.
Planning ahead will afford you more say in what the transition will look like. In fact, everyone can sleep at night knowing there is some clarity around the future. It is critical to take steps now to ensure you have a choice around how and when you will exit. You need to be proactive in determining and protecting both the business and your family!
No time to deal with the issue
Understandably, most business owners have great difficulty in setting aside the time to work on their business in addition to working in their business. But it is the working on the business while the sun is shining that will help you protect it, and ultimately your family, from the rainstorms that loom ahead.
Time is money, and having a professional advisor guide you through the process can be a huge timesaver. Your trusted BDO advisor can help you to quickly determine the strategies and tactics that are right for you.
Can't find adequate advice/tools to start
The BDO SuccessCare Program is recognized as an all-encompassing approach to supporting the continuity of businesses just like yours. We have a comprehensive package of proven and effective services for entrepreneurs and families in business. We will be happy to share with you the concepts and tools that best meet your needs.
For example, selecting a suitable successor is a major obstacle for many business owners. They may lack confidence in the abilities of a prospective successor, or they may fear choosing between family members and causing conflict. Note that your business can be just as successful under the leadership of someone else provided they have time to develop. Using our approach to help you plan earlier rather than later, we will first identify the qualities that are required for the position of leader and help you determine who is right for the role. We will then help you develop a personal development track for your successor in order to build the skills, confidence and leadership required.
Too complex
A family or privately-owned business is a very complex entity so it's no surprise that most entrepreneurs find the entire transitioning of the business equally complex. The make-up of a privately-owned business is considerably different from the structure that forms the basis of a public company. A public company must rigorously apply a 'business first' policy in all its business operations, strategic planning and decision-making processes. The successful operation of a family or privately-owned business, however, is also dependent on common interests and healthy relationships within the family or ownership unit.
Consequently, family connection and relationships play a huge role in whether or not the business can be transitioned successfully. Most business owners think they are on the same page as their selected successor and fail to plan adequately. One survey reports that only 16% of business owners seek input from their successors in developing a transition plan.
In order to maintain stability within the business and manage the disputes that can develop as a result of the changes, it is extremely important that you share your thoughts and plans with your family, key employees and successors.
Don't want to think about leaving
Underlying many of the reasons for failing to address the inevitable transition of their business is the fear entrepreneurs have of leaving what they have worked so hard to build. The business is their life and they do not want to give up control. We can show you how you can gradually delegate control while finding a way to still employ your unique abilities. You can develop a track that will allow you to slowly step away from the business while doing what is needed to protect your family and the company.
Conflict with family/employees
Relationships and family dynamics are big factors in successfully transitioning your business. It is understandable that many business owners are reluctant to try and reconcile the differing personalities, values and principles that exist in their family unit. Even more surprising is that this barrier is so low on the chart.
In reality, the three percent is a blend of family and non-family business where 17 percent of family businesses cite conflict as a major barrier to planning a transition, while a much lower 4.3 percent of non-family businesses see conflict as an issue.
Ignoring conflict is like ignoring that gnawing toothache. Sooner or later the tooth will become abscessed. The result is severely debilitating pain and a problem that is much more difficult to resolve.
With the appropriate structures in place, you can address any potential conflict and clear the way to moving ahead with a transition plan.
As advisors who specialize in consulting to privately-owned businesses, we at BDO can guide you and ensure you have the resources required to address this obstacle.
Other
Among the other reasons shared by survey participants are the issues of financing the transition, and access to cost-effective advice. While many business owners would like to pass the business over to family members, most are concerned about how they will resolve the issue of finances from the perspective of both the owner and the successor. The current owner is concerned about his or her dependence upon the business for income and how the successor might secure financing for the purchase. This is one of those technical areas through which your BDO advisor can guide you.
Generally, business owners consider planning to be an optional expense rather than an investment in the future. You can keep costs to a minimum by engaging an advisor whose approach ensures your time and resources are not wasted, and acts as a coach to guide you through the entire process.
So why take such a chance with your own and your family's future when there are some simple strategies that will protect your equity? Take the first step to investing in your future right now. Contact your BDO advisor, or call our Business Transition Services team at 1 800 598 6400, to begin the process of ensuring you are able to complete all the necessary steps before it's time to exit. Isn't this an investment worth making?