Are Business Owners Really Ready to Exit?
Last year one of our advisors, Cameron Earhart, was trained as a Certified Exit Planning Advisor. This organization produces regional State of Owner Readiness Reports. This year they released their second national readiness report and compared the results to ten years ago. It provides some interesting insights.
The whole report (available here) is worth your attention, I found the graph below particularly interesting.
“Rate yourself on how ready you consider yourself to be personally to exit your business on a scale of 1-6”
What you are seeing is a self assessment. Respondents were asked to rate themselves on their readiness to exit their business on a scale of 1-6 with 6 being considered a perfect readiness score, 5 best in class, 4 above average and so on.
Compared to ten years ago respondents consider themselves to be much more prepared to exit their business. From first appearances it looks as if business owners are more prepared than ever to harvest the value in their businesses.
They say they are ready, but are they?
The number of business owners that consider themselves above average, excellent or perfect in their readiness to exit (scores of 4, 5, or 6) has increased from 38% in 2013 to 65% in 2023. But there are other insights in the report that point in a different direction.
Only 41% of business owners have a formal written personal plan that covers their personal goals and ambitions, both in the business now and after they plan to transition.
About the same number, 40%, did not have a financial plan that spells out how they will cover their current lifestyle in the event of a business transition. That is striking because 70% said they need the current income from the business to support that lifestyle.
When it comes to long range family planning 70% did not have an estate plan.
Most striking is that 68% don't have a written, formal transition plan for the company. This means that they do not have the ability to communicate a plan (even assuming they have one in their head) to the team responsible for executing it and locking in the value they need to transition successfully.
Take Aways
Most of today's business owners believe they are ready to exit.
Most of today's business owners don't have written plans enabling them to communicate critical and necessary pieces of their desired exit to key employees, advisors and family.
There appears to be a widening gap between the business owner's confidence of a successful exit and the realistic ability to achieve that exit.
The biggest two questions I have after reading this report are:
First, how much of the current sentiment is driven by recent economic success? Remember, ten years ago many business owners were still struggling to regain their footing after the Great Recession. Many businesses today are coming off 2 record years that could be creating a false sense of security.
Second, how much of the self reported readiness is backed up by actionable plans? What we see in the market mirrors the 70% of respondents that don't have written and reviewed plans. At Axiom we deal with the business planning side of this (see what that looks like in this real life case study). But I would bet that professionals in other disciplines experience the same in financial, personal and estate planning.
The Opportunity
Business owners can separate themselves from their over confident competition by putting written plans in place that give their families financial security and their teams a chance to grow the value of the business (creating more opportunity for themselves and increasing the value of the business).
Advisors can highlight the difference between a plan in the mind and one on paper. We owe it to these business owners to help them substantiate claims of readiness by digging deeper to make sure there are actionable plans and a team capable of executing those plan. This goes for personal financial plans, estate plans and business plans.