Every business owner has heard the horror stories of someone who died unexpectedly, became disabled or incapacitated, watched their children who they expected to be their successors walk away from the family business, or a whole host of other scenarios for the unexpected that hurt the company they spent their lives building.
Business owners always think of themselves as being cutting edge in their thinking, keeping up with technology advances, finding new ways to attracting or retaining customers, and creating new ways to add more to the company’s bottom line. Yet when it comes to planning not just for the unexpected but the expected, business owners fail to plan in horrifying numbers.
63% of business owners have no succession plan, and it is even worse among Baby Boomers where 74% fail to plan. This makes no sense as over a third (38%) of Boomers plan to retire in the next three years.
What makes these numbers even more mystifying is that 78% of business owners expect to fund 60-100% of their retirement from the proceeds of their company, which they hope to sell; over 10 million business owners plan to sell their businesses to fund their retirements in the next ten years. 70% of family businesses want to pass it along to their family, and 42% have family members in the business to try and make the transition more natural. Moreover, in 2015 more than two-thirds of companies sold were sold by Boomers. Yet they do not plan on how to sell the business or to pass it along to their family.
One of the most interesting issues that arise in this "Fail to Plan" landscape is the reasons given for not having a plan and understanding the real psychological basis for failing to plan. Deep down, even owners who say they want to retire in the next three years psychologically do not want to leave and thus have little interest in planning. Most common other reasons include are: a belief that having a will is sufficient, that important succession decisions have not yet been made, that their family knows their wishes, they deem themselves "too busy" to make a plan. Still, some are honest enough to admit that they aren't sure what they need to do to plan for their succession.
The percentage of owners who do plan ahead varies by the size of the business. For companies worth $3-4 million, over 70% of owners have failed to plan, while company’s worth over $10 million have only 45% of owners who fail to plan. Do owners of larger companies have more time to prepare, or are they bigger because they do plan more?
While it is easy to get caught up in the polling statistics cited above, this is a genuine problem facing Boomers, as so many are planning to retire shortly. The percentage of Boomers retired has skyrocketed from 10% in 2010 to 17% in 2015.
When Boomers and others finally do put the time into putting together a succession plan to sell the business rather than passing it on, owners find that it is hard to monetize many businesses or to market a business unless they have an insider or family member willing to be the buyer. Every owner assumes that his or her business is successful enough that someone will buy it. While there is probably a buyer that does exist somewhere for some price, maximizing that price is the main reason why you plan.
Owners often note that part of the problem in making plans, which involve attempting to leave a business to the next generation, is that having family members involved in this process complicate the decision-making. 75% say this is a real problem, as over 50% felt compelled to hire family members even if they do not think it is not the right decision for the business. Oddly, 60% of these same business owners believe that having family members involved is a competitive advantage for their company. With almost 60% of businesses being owned by one person, these problems are quite real and widespread. Critical questions that every business owner must face to assemble the right succession plan in these situations include "How do you divide control among family members?" and "Are my family members capable of succeeding me?". Business owners recognize how vital these decisions are as 47% want outside professionals to help run the business.
While these questions are tough, they must be answered. There is also a ray of hope to those planning on leaving their businesses to the next generation. Surveys show over and over that the next generation is excited about taking over. In fact, 75% of the "next generation" say they have "big plans" to move their family business forward, and only 7% of these Next-Genners think their company is fit for the digital age. These polling numbers provide business owners with great insight as to how to approach their possible successors and to find out what these "big plans" are. Owners will obtain great views into the capabilities that might otherwise be obscured because family members never get a chance to show what they know or are capable of. Only 50% of business owners include their families in succession planning. This is unfortunate because whether an owner should sell or pass on to family depends entirely on that owner's evaluations of their family members. The more the family is included in the discussions, the more the owner can make the best decision whether to sell or pass it on.
Do not be part of that 74% of Boomers who fail to plan. Get started today by calling Greg Harr, our transition specialist.
Research collected from the Census website and survey led by Creighton University.