The state of Wisconsin owner readiness is…mixed
December 6, 2018
By Martha Sullivan, CPA, CVA/ABV, CM&AA, CEPA
Partner, Succession Planning Practice Leader
Martha leads HK’s succession and exit planning services division and is a regular contributor to Wisconsin’s InBusiness digital magazine.
In November, the Wisconsin Chapter of the Exit Planning Institute released its findings from the 2018 Wisconsin State of Owner Readiness Survey. The survey, which Honkamp, Krueger & Co. co-sponsored, was completed by Wisconsin business owners earlier this year and assessed how well these owners were prepared to transition their businesses upon retirement. This type of survey has been completed on a national basis (2013 and 2015) and regionally since then.
We wanted to understand how we here in Wisconsin fared compared to the rest of the nation and markets. Overall, we share a lot in common with these other markets, and the good news is, armed with the findings, business owners have a tremendous opportunity to act and improve their personal outcomes.
The profile of the owners that took the survey includes:
- Over the age of 53 (65 percent)
- Male (70 percent)
- First generation ownership (67 percent, with 62 percent of the companies having been started from scratch by the owner)
- Running a small, family business (58 percent less than $5 million in revenue; 24 percent with between $5 and $25 million in revenue)
As a group, the owners overwhelmingly acknowledge, “having a business transition plan is important both for my future and the future of my business” — 93 percent agreed with that statement. This statistic alone provides a reason for optimism.
However, the optimism balloon quickly deflates as you study the report. Our collective actions paint a different picture than our words. For example:
- 83 percent of the business owners have not written an organized business transition plan.
- 43 percent have done no planning at all.
- Almost half (46 percent) want to be out of the business in the next five years.
- Three quarters (76 percent) want to be out in the next 10 years.
- 82 percent responded that it would at least be helpful to them if the company remained profitable after they left it for their transition plan to be successful. Over half said it was “critical,” presumably because they understand that they may be providing seller-financing or subject to an earn-out provision.
- 74 percent have done little to nothing to educate themselves on what is involved or needed to have a successful transition, such as what the alternatives are, what the process is, what factors to consider, how long it takes, and so on.
Wisconsin owners are not an isolated case. These statistics have been consistent across the country. When one considers the fact that baby boomers are retiring at a fast pace and two-thirds of all privately held businesses are owned by baby boomers, this data is both alarming and concerning. The simple laws of supply and demand suggest that there will be many business owners seeking to transition their companies all at the same time — and most will be ill-prepared for the process, experience, or outcome. Competition will be fierce to be the “chosen one” and exit with the structure and outcome they desire. At best, many owners may transition the company, but it won’t be on the terms — timing, structure, payout, or residual risk — that they want. At worst, owners may find themselves with simply closing their doors as their only option because they did not educate themselves on what it takes to craft a successful transition.
For example, I met with a business a few weeks ago that is made up of five owners. Two of the owners are over 65, two are in their early 60s, and one is in his mid-50s. The two oldest owners want their investment back within a year or a maximum of two years. The others are willing to go a couple more years beyond that, but really, in their heart of hearts, would be happy to cash out now, too. Wisely, they had a calculation of value performed to give them an idea of what the market might give them for the company should they try to sell it today. If the number was right, they wanted to start the process to sell. We walked through the process of selling a company and they learned that it takes, on average, nine to 12 months to market and sell a business that is truly ready to go to market.
When the valuation came back, they didn’t like the answer. (In my experience, this is not unusual. Business owners almost always overestimate the value of the business. Reality can sting.) Their value was suppressed by several key factors, the biggest one being a revenue base that was heavily dependent upon one customer. This dependence had squeezed gross margin so hard over time that their overall gross margin and net income metrics were substantially out of line for their industry. To significantly impact the value, they would have to reduce customer concentration and improve gross margin substantially — neither of which are easy to do in a short period of time. Even if it were possible, the youngest of the owners asked the others a very insightful question: “Are you really willing to put in the 80-hour workweeks that it will take to turn this around?” The room went very quiet.
Like the respondents to the survey, these owners delayed preparing for their exit. This analysis and conversation should have taken place years ago, so they had enough runway to take flight. Instead, they are destined to be disappointed in the outcome. The company will sell but it won’t be the deal they wanted.
The survey concludes, “many business owners don’t know what they don’t know.” In the absence of knowledge, they risk finding themselves in situations like the five owners above. Maybe there’s time to react, adapt, and improve, but sometimes there isn’t.
Herein lies the opportunity though for Wisconsin owners. As many as 76 percent of us want to transition our businesses in the next 10 years, and 46 percent of us within the next five. Time is of the essence, so:
- Read the survey (www.ownerreadiness.com);
- Take it to heart;
- Get educated on what creates and drives value in your business;
- Learn what it takes to set the stage for a well-crafted and successful transition (regardless of your timing);
- Build your plan; and