Business owners need help in planning for continuation

1. The majority of a business owner’s wealth is tied up in their business. Typically, about 90% of a business owner’s wealth is in their business.

2. Only about 30% of family-owned businesses survive the second generation, about 12% survive the third generation, and about 3% survive the fourth generation.

3 Over 50% of business owners will try to sell the business themselves.

4 50% of agreed deals never close due to the deal not being able to get through the due diligence stage.

3. Are they planning their exit already?

For most business owners, it feels strange to think of leaving the company when they’re just setting out or still in the midst of growing it. Even so, they should start planning their exit from Day One. Many owners, for example, will want to draw income from the business for their own benefit throughout their working life. But when it comes to sale, this can make it harder to prove the company’s value. Again, a good option here (especially for those not looking to sell for many years) is to use a key person life insurance policy. Over time, this will allow them to build a substantial cash value in a tax-optimal way. It will also make the business more attractive to buyers because it offers reassurance that if a key person were to walk away after acquisition, the policy could help fund a buy-sell agreement or contribute toward the cost of recruiting a successor.

4. Are they saving for retirement?

Running a small business is hard work, often leaving little time to think about anything else! Many owners may therefore forget there’s more to life — and personal finance — than business, neglecting the crucial need to create economic value for themselves outside their company. A large majority of business owners don’t even save regularly for retirement, relying instead on their business as their biggest asset.

Yet ideally, owners should build a diversified financial portfolio that ensures they’re financially well prepared for exit no matter what. Whether it’s through tax-efficient savings vehicles, retirement accounts, solid insurance coverage or personal assets not tied to the business (such as real estate), it’s vital to ensure owners are actively planning for life after work.

5. Have they determined a valuation?

A key aspect of any exit strategy is the business valuation, so owners should consult a qualified advisor to determine this. There are also transition managers whose role is to assist sellers with their business exit strategies. Even the smallest companies can find buyers if the business is in a position to transfer value to a different owner — but this transferability of value is key. Businesses for which success hinges on the unique drive, talents or social relationships of a single individual often don’t meet this standard, making a sale more unlikely.

Of course, there are many other ways small-business owners can build assets and cash value over time. It’s the advisor’s job to lay out those options and help the owners decide which one (or more) best suits the unique needs of their lifestyle and their company. While the answer to these five questions may be different for every small-business owner, what’s invariably true is that by discussing their exit and key person strategies with them now, we can significantly improve the likelihood of their leaving their company exactly how they want to in future.

Perry Goldschein, J.D., is a financial professional with Equitable Advisors. He may be contacted at perry. goldschein@innfeedback.com.