10 million small business owners plan to sell or close their businesses over the next 10 years to fund their retirement, according to CNBC. That means many business owners believe they have a transferable business asset. Taking this one step further, they believe there is enough value in their business assets to fund their retirement.
For most owners, this isn’t true. Many businesses are not positioned for a sale event and will not be valued at their owner’s level of expectation. The good news is that all of this can be addressed if you give yourself enough of a runway.
The impact of small business is significant. The Small Business Administration estimates there are 28 million small businesses in America. They account for 54% of sales in the United States, 55% of all jobs, and 66% of all net new jobs since the 1970s. The number of small businesses in the U.S. has increased 49% since 1982.
The SBA defines small business as any enterprise that employs fewer than 500 employees. In the U.S. accounts receivable management industry, this applies to the vast majority of all businesses. With more than 5,000 collection agencies in the U.S., less than 5% of them employ more than 500 people.
A recent FPA/CNBC business owner succession planning survey found that 78% of small business owners plan to sell their businesses to fund their retirement. However, according to the survey, less than 30% of participants have an exit plan. That number seems very high to me. Most owners that I interact with are fixated on their business’s current performance with little or no planning for a sale. I recently spoke to an owner of a collection agency who said that he wants to start getting his business ready for a sale in a few years. Kudos to him! However, this owner has an unfair perspective; having sold his business once before, he wants to be prepared this time around.
Entrepreneur David Lavinsky summed it up well when he said that most entrepreneurs fall into a very dangerous trap once they launch their business. Owners are very myopic, getting so close to their business that they fail to see the big picture. They run their business for short-term wins, striving to generate more profit than the year before, but they fail to plan for the end game. The owner who positions his or her business for a sale event over an extended period of time is much better off than one who waits until ready to sell.
I encourage you to spend some time thinking about the end game. You know your own business better than anyone. Jot down what adds to or detracts from value in your own business. Once you make this list, put resources toward expanding upon the positives and addressing the detractors. For a service business like a collection agency, here are three important questions to ask yourself about your own business:
- Who really runs your business? If the answer is you and you want to exit upon sale, start transitioning decision-making responsibilities and client relationships today.
- Do you have one client or a few clients who generate a high percentage of your revenue and profits? If the answer to this question is yes, no matter how desirable that client might be, make a considerable effort to diversify. For a service business, the cautionary yellow flag starts to go up when one client generates 20%.
- Are you investing in your business to grow and gain a competitive advantage? Many business owners are more concerned about distributing profits than reinvesting back into their business. Your course of action along the way will have a direct impact on purchase price when it comes time to sell.
There are more questions that pertain to your particular business. Write them out and give your team time to implement change. Planning will inevitably result in an increased purchase price and better deal terms when it comes time for a sale.