Through my professional work in exit and succession planning, and supported by recent reports from my company and industry experts, I’ve observed a shift in owner readiness and the potential for value creation.
The 2023 National State of Owner Readiness Report, published by the Exit Planning Institute, along with the Value Potential Index Report June 2024, published by my company, reveal critical insights into the future of exit planning.
These insights are particularly relevant for the approximately 6 million small businesses (SMEs) with employees in the U.S. In Australia, SMEs make up 97% of all businesses, employing an estimated 5.2 million people, paying $194 billion in wages and salaries and generating $1.4 trillion in income.
The impending wave of exits—the Exit Planning Institute report found that 75% of owners indicated they would like to exit within the next decade—presents both challenges and opportunities.
Understanding Owner Readiness
The State of Owner Readiness Report by EPI indicates that business owners are increasingly aware of the need for exit planning. Over the past decade, there has been a marked improvement in the education and proactive measures taken by owners regarding their exit strategies.
This latest report shows that the focus on exit planning has increased fivefold since 2013, driven by a growing recognition of its importance for successful transitions.
Key findings from the report include:
• Generational shifts: Younger business owners are more inclined to engage in exit planning compared to their older counterparts. This generational shift is crucial as it indicates a more strategic approach to business transitions.
• Continued gap in financial readiness: While many owners feel financially prepared, there remains a significant gap in areas such as estate planning, which I believe suggests a need for further education and support.
• Lack of transition teams: Despite the increased awareness, many owners still lack formal transition teams, highlighting an area where advisory services can play a pivotal role.
The Value Potential Index
My organization’s Value Potential Index Report provides a complementary perspective, focusing on the valuation landscape for mid-market businesses.
With $15 trillion expected to change hands over the next decade due to these exits, the implications for the economy are profound. This translates to an average of $450 billion annually, a stark increase from the $100 billion per annum seen over the last 10 years.
Key insights from the Value Potential Index include:
• Valuation growth: The index has shown a significant increase in business valuations, reflecting a broader trend of asset appreciation post-pandemic. The current value of U.S. privately owned businesses is approximately $24.3 trillion.
• Market dynamics: Understanding a business’ value potential becomes critical as it prepares for sale. Owners who actively enhance their business value are better positioned to achieve successful exits.
Learn more about the Capitaliz VPITM here:
The Acceleration Of Exit Planning
The convergence of these reports underscores a critical moment for business owners. The acceleration of exit planning is not merely a trend; it is becoming a necessity. As the market dynamics shift, owners must adapt to ensure they maximize their business’s value before transitioning.
1. Proactive Planning
I encourage owners to start planning early. Engaging with advisors to create a comprehensive exit strategy can significantly enhance the likelihood of a successful transition.
2. Education And Resources
The increase in educational resources available to business owners is a positive development. Programs focused on exit planning can equip owners with the knowledge needed to navigate this complex process.
3. Building Transition Teams
Establishing a dedicated transition team can streamline the exit process. This team should include financial advisors, legal experts and business consultants who can provide tailored guidance.
4. Value Enhancement
Focusing on improving business operations, customer relationships and financial health can lead to higher valuations. Owners should consider strategies that enhance their business’ attractiveness to potential buyers.
The key finding from the Value Potential Index report is that the value gap that exists within these businesses is approximately $3.7 trillion, or $900,000 for small businesses and up to $1.3 million for mid-market businesses.
Conclusion
The landscape of exit planning is rapidly evolving, driven by a combination of demographic shifts, increased awareness and economic pressures. As we look ahead, the next decade will be pivotal for business owners in the U.S.
I believe the insights from these two reports highlight the urgency for owners to engage in proactive exit planning. By doing so, they can secure their financial futures and ensure their businesses’ legacy continues to thrive.
As the wave of exits approaches, the call to action is clear: Business owners must prioritize their exit strategies now to navigate the complexities of transition successfully.
The potential for value creation is immense; those who prepare will reap the rewards.
A focus on value acceleration, a key aspect of exit planning, can help close the value gap and bring further resources into the hands of exiting business owners, their families and wider communities.
