Approximately 75% of business owners regret selling their business within the first year following the sale, according to a new report. Why? The emotions of running and owning a family business are complex, and disentangling your identity from the business can be challenging. However, we suspect some of the heartache comes down to poor planning, the feeling of leaving money on the table, and a harried transition process.

So, have you checked in on your succession plan? Do you have a living document you discuss and update with your family board? Or does it live inside your head? In previous posts, we’ve offered case studies on family empires that have successfully transitioned from one generation to the next. But how does your business’s succession and exit plan stack up?

The 2023 National State of Owner Readiness Report issued by the Exit Planning Institute is a helpful summary of how other family businesses are handling succession and exit planning. The report asks questions such as:

• Do we have a formal succession plan?
• How do we want to exit the business?
• Have we obtained a formal valuation?
• Do we have a transition team?

Who Does the Survey Cover?

The 2023 National State of Owner Readiness Report survey includes responses from a variety of family-run and privately held companies.  Companies surveyed come from across the country and owner-generation cohorts. Approximately 35% of companies reported revenues below $5 million, 36% between $5 million and $50 million, and 29% over $50 million. Companies also operated in diverse industries, with top respondents including construction, finance and insurance, professional services, and manufacturing. Finally, 68% of companies were 100% family-owned.

Let’s Keep It in the Family

According to the survey, 70% of business owners understand all of their potential exit options and prefer an internal transition (compared to an outside sale). Of the group preferring an internal sale, family transition was the top choice among respondents. Whether you want to keep it in the family or are exploring an outside buyer, understanding the likely buyers of your business (and reasonable exit values) can help you and your family board understand the pros and cons of any exit scenario and ownership transition.

Do We Know What Our Business Is Truly Worth?

The survey sought feedback from respondents on steps businesses had taken on their business transition plans.  According to the survey, 60% of business owners indicated they had obtained a formal business valuation within the last two years. However, the majority of these valuations were not for transaction or exit planning scenarios. 43% of respondents reported acquiring valuations for estate planning and tax purposes, while only 15% sought a valuation for transaction purposes. Business owners should be aware the “purpose” of their valuation can have a big impact ultimately on the range of estimated value outcomes. Valuations for estate planning and gift tax purposes generally exclude strategic buyer considerations, relying on a non-specific “hypothetical buyer” of the business interest subject to the appraisal. Acquiring an appraisal to explore a sale could provide a better picture of your potential exit proceeds, allowing you and your family to make a more informed exit planning decision.

Is My Business Ready for Sale?

Family businesses want to know what their business is worth today. But before you think about your exit, another question to ask is what you can do today to make your family business more valuable tomorrow. The 2023 National State of Owner Readiness Report discusses multiple actions business owners can take to be ready for an exit, as well as how respondents in the survey fared. In general, around 50% to 60% of respondents were taking steps identified as best practices.  These actions included having a formal exit plan and education, understanding their buy-sell agreements, regularly tracking their business’s value, and assembling an informal team of exit planning advisors.

To state the obvious, if 50% to 60% are following best practices, that leaves almost half who are not. The best practices outlined in the survey align well with a framework developed many years ago by the founder of our firm, Chris Mercer. This framework was rooted in Chris’s realization that if your business is not ready for sale when opportunities arise, you will miss out on significant potential benefits upon your exit, including exit value and overall satisfaction. To read more on this, check out Chris’ book Unlocking Private Company Wealth.

Every family business will experience transition through internal or familial succession, a public offering, or an outside buyer. While you can’t plan for every contingency, there are certain steps you can take to ensure you have as smooth and positive an outcome as possible. Mercer Capital has worked with thousands of family businesses across the country over the past forty years. Give one of our professionals a call to be part of your exit and succession planning team.