Businesses are reopening following an interruption that no one alive has experienced. The challenges are many. How to keep employees safe. Will customers come back? Will there be another shutdown? The immediate questions are full of uncertainty. There are also existential questions to the family business.
Is there a way to avoid the small business owners’ personal wealth from being destroyed? Most owners are primarily focused on recovering lost income. There also needs to be a proactive focus on the bigger picture which is the owner’s wealth.
If this focus doesn’t change, an unprecedented period of wealth destruction is certain for business owners in the US. It sounds like hyperbole but consider the facts.
Before COVID19 cripled the economy, most small businesses in the United States were already not transferable. The business has no value if the owner isn’t actively engaged in the day to day operations of the company.
The average business owner may have up to 80% of their wealth tied up in their business. Is the other 20% going to be enough to carry them through their retirement?
It is no wonder that nationally, 70% of the businesses that are put on the market do not sell. Owners are just not prepared to successfully transition their business. This is also true for family transitions. Nationally, only 30% of family-owned businesses will transition to the next generation and only 12% to the third generation.
Preparing for transition is vital to being on the right side of these statistics. Owners should harvest the wealth that has been built over decades. This preparation also has ramifications to jobs and tax revenue of local economies.
Take Los Angeles County as an example : there are 244,000 small businesses according to the Small Business Administration. This represents billions of dollars of wealth for owners and families. Also, nearly half of all California jobs are from small businesses so these numbers represent hundreds of thousands of jobs.
The readiness issues that are most typical in businesses cannot be solved when a crisis comes. They require strategy, planning, execution, and time.
Common issues include :
systems and processes
family member conflicts
A team can be put together to address these and other readiness issues. Allocating time and resources to this challenge is not easy but the alternative is unacceptable. The alternative is that the business will not be able to harvest the equity built over decades of work. There is no reason for this to happen.
There are many more transfer options available than most business owners realize. Options include transferring to a family member, partner buy-out, or 3rd party sale. Once the owner has narrowed down the options that fit, specific action plans can be laid out to achieve the desired outcome.
In the post-COVID19 recovery, there will be new challenges :
business model changes
employee and management issues
credibility of company financials
real estate concerns
will the market for business sales be flooded by businesses looking to exit?
These are important questions and concerns. They can and should be addressed through the lens of the strategic value of the company. This means a major shift in thinking.
The strategic focus should change from operational income to enterprise value. If the plan is well-executed, the value focus will increase income. Why? Because this work is, fundamentally,good business strategy.
When businesses prepare for transition successfully, wealth is preserved, jobs are saved, and tax revenue continues to state and local economies. Entrepreneurs need to rise to this challenge and take action now.