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It is estimated
that Baby Boomers will transfer over $10 trillion in wealth, much of it held
in privately owned businesses. Yet with retirement quickly approaching, a recent
study finds that the vast majority of business owners have not started planning
for the biggest wealth transfer in history, mainly due to confusion about how
to start the exit process.
Despite confusion about
exit strategies, 47 percent of middle-market business owners 55 years and older
are interested in selling their businesses within three years, and yet over
90 percent of business owners have not initiated the planning process, according
to a survey released today by leading middle market advisory firm Orion Capital
Group. 71 percent of those surveyed indicated they would sell their business
to a third party, but only 9 percent indicated they wanted to transfer their
business to family members.
“It is striking that
a vast majority of owners prefer to sell to third parties, but only one in ten
have initiated the planning process,” said Neil Shroff, managing director
for Orion Capital Group. “Owners of privately-held businesses have many
options, whether they want family members or employees to continue the business,
or whether they prefer a sale. However, by waiting until the last minute to
make a decision, many business owners unintentionally eliminate some of their
best opportunities.” The survey revealed that a lack of knowledge about
available resources accounted for 39 percent of those without exit plans, and
a lack of time accounted for another 27 percent. Shroff said “Many buyers
prefer that the owner continue to work anywhere from one to five years after
the sale to smoothen the transition. If an owner waits to sell until he no longer
wants to be involved with the business, the buyer will usually reduce the price
to account for the riskier transition. Early planning alleviates this risk.”
The Orion Capital Group
survey underscores the importance of synchronizing the efforts of CPAs, attorneys,
and financial advisors well in advance of an exit. However, an astounding 77
percent of business owners were unaware that exit-planning professionals exist.
“Your financial planner holds a piece to the puzzle, as do your attorneys,
CPA’s and tax specialists. Exit planners and intermediaries fit the pieces
into the context of a comprehensive plan that they help manage and execute,”
Shroff remarked. “Start a dialogue with an intermediary. An early dialogue
is not a commitment to sell, but it’s very important for business owners
to understand what they can and should do while they are still able to implement
those strategies.”
While many business owners
are eager to sell, Shroff said the survey revealed that taxes and legal fees
were major concerns of owners contemplating all types of exits. Over 23 percent
said that the amount of tax and legal fees involved in the sales process was
the most important factor in deciding to sell. “Again, careful planning
is important. The transactions where legal fees and taxes are typically highest
is when the planning begins immediately before the exit, and at that point it
is simply too late to engage in effective tax planning,” Shroff explained.
“With an election approaching, and many tax cuts set to expire, it is
especially important for business owners to educate themselves about their options.”
Business owners who are
waiting to sell cited many reasons, with 19 percent citing market conditions,
and 24 percent indicating they were waiting to build profits. “Timing
can be everything,” Shroff commented. “We’re seeing increased
interest from strategic buyers who were previously priced out by private equity
groups that relied heavily on credit. Good deals are continuing to get done,
and the deal volume in many industries is increasing. The important point is
that business owners should have a plan so that they can act quickly when an
opportunity arises.”
Bain Surveying, Inc conducted
the survey, which polled over 350 business owners across the United States aged
55 and over. Businesses polled had annual sales between $5 and $76 million.
An interactive version of the survey is available at Orion Capital Group's website
where business owners can compare their results to those surveyed.
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