After investing thousands of dollars and multiple years in their companies, many owners have the dream of one day selling their business. Yet most will never be sold.
How Many Businesses Actually Sell?
An article published in The New York Times (September 4, 2014) reviewed the number of businesses listed for sale each month on the website, BizBuySell.com. At any one time the site typically lists about 30,000 businesses for sale. But according to the website’s most recent Insight Report, there have been between 1,840 to 2,368 transactions closed per quarter over the last five quarters. This means that on average, only 6.8% of the businesses listed on the site are being sold in any one quarter.
Not everyone believes the situation for owners is quite that dire. Richard Parker, president of The Business For Sale Buyer Resource Center, states “only 20% of all of the business listed for sale ever sell” and “business brokers only account for 10% of all transactions.” This still means a lot of owners are struggling to find a buyer willing to pay anything close to the asking price. (For related reading, see: 7 Steps to Selling Your Small Business.)
Comprehensive Wealth Planning for Business Owners
Knowing this, the business or practice should be a central part of the owner’s ongoing wealth and financial planning. Most investors meet with their financial advisor at least once each year to review their retirement and other investment accounts. If they own a business or other holdings, such as real estate, the value and strength of these should also be included in each review. Otherwise the owners will be left with an incomplete picture of their total wealth, leaving them and their families at risk.
At times, however, even this information is not enough for the owner to create a viable long-term wealth plan. Remember, most companies will not sell! For this reason, as they manage and grow their business, owners should also increase their non-business holdings.
Case Study: Comprehensive Planning for a Building Contractor
Over the years, we have worked with several building contractors. To fund their growth, owners would reinvest thousands of dollars back into their companies. Unfortunately, this left them unprepared when the demand for construction slowed. To make matters worse, if they were thinking about retiring they soon discovered that very few contractors sell their company as an ongoing business. It’s just the way it is. (For more from this author, see: Keeping Your Business Investment on Track.)
By including the transferable value of their construction company—a value that was reasonably reduced to consider the marketability of the business—in their total wealth planning, we developed a business transition and investment strategy for the owners of a successful commercial contractor. The first step was the most difficult: they had to decide to invest outside of their business, even when doing so would slow its growth.
After reducing the amount that had been reinvested in the company, the owners could increase their non-business holdings and portfolios. This improved their overall diversification and reduced their previous investment risk. In our ongoing reviews and planning, we monitored and updated the value of their entire wealth, including the construction company, real estate, equipment, insurance, work-in-progress and investment accounts. This gave the owners an up-to-date assessment of their net worth and enabled us to help them make better, more confident decisions about their future.
By the time the owners were ready to retire, their non-business holdings had grown large enough they no longer needed to receive a premium price for their construction company. Instead, they sold the business to their management team for book value. Not only did this reward those who had helped grow the company, but the owners could structure the sale in a manner that benefited all parties. Furthermore, the new “ownership team” found it easy to be responsible for the outstanding construction guarantees since they had overseen most of the work.
Review Your Entire Net Worth, Both Business and Non-Business Assets
For owners hoping to sell their business or professional practice at a premium, it is important to accept this hard truth: it isn’t likely to happen. Consequently, your journey to true financial success begins with a review of your total net worth and incudes a realistic assessment of the transferable value of your company. Then, over time, as you consistently review both your business and non-business investments, you will be able to design and implement a unified strategy for your entire wealth; a strategy that will be both rewarding and fulfilling for you and your family.
(For more from this author, see: How to Really Take Charge of Your Retirement Plan.)