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Education

In addition to helping owners and their advisors know what they’ve got, grow what they’ve got and know their transition options, SPARDATA also offers educational programs on various business transition topics.

Programs for Business Owners

Programs for Advisors

Programs for CPE and CE

Things We’ve Learned
(in working with business owners and their advisors for over 20 years)

 1.  Some facts about American small businesses:

  • 4.9 million American businesses have employees.  (Another 17 million have none).  
  • 1.2 million businesses – about 25% — have 10+ employees.   Their owners are the proverbial ‘millionaire next door’.   
  • Only 11,000 of the 4.9 million are public companies.  The rest are found on Main Street. 
  • 71% of new businesses fail within 10 years. 
  • Private business owners power the American economy and create most net new jobs.  They are leaders in their communities.  They are the “MVPs” of American society.
  • Small business owners (“SBOs”) are older than the general population: 61% are 45+ (and 31% are 55+).  They should be doing exit planning but few are because… 

2.  The term ‘exit planning’ is a turn-off for most SBOs.  Most owners love working in their businesses and intend to remain involved with it for the foreseeable future – although the role they play may change over time.  To them ‘exiting’ is the same thing as ‘dying’ and is an issue fraught with negative emotions.  The best way to elicit their aspirations is to frame the discussion about ‘transitions’.  Don’t ask “what is your exit plan” (like asking “what is your death plan”).  Instead ask “if you had a magic wand, how big would your business be 10 years from now?  And what role would you play in it?” 

3.  Successful SBOs are experts at running a business but most have little or no experience transitioning to a less active role. 

4.  SBOs usually work with a CPA, an attorney, a financial advisor, a commercial banker, a property and casualty insurance agent and a life insurance agent.  More often than not the owner hasn’t discussed ‘transitioning’ with any of them, nor have any of them proactively raised the issue.

5.  For most SBOs their current transition plan is to sell the business at some point in the future.  Actually a sale to a third party is highly unlikely.  According to New York Times blogger Barbara Taylor (an M&A professional):

  • 10% of businesses are sellable – i.e. would fetch offers if put on the market today;
  • 40% are currently unsellable but could become sellable if they ‘grow what they’ve got’;
  • and 50% will never be sold (too dependent on the owner, lousy business, etcetera).

6.  Even for the 10% of SBOs who own sellable businesses, a sale may not be their best option.  True, selling to a third party will obtain the biggest check BUT:

  • the biggest check won’t necessarily yield the most after-tax dollars (stock sales are taxed at low capital gains rates; asset sales are taxed at high ordinary income rates);
  • the M&A process gives competitors an opportunity to gain valuable ‘inside information’ – with no obligation to make an offer, let alone one the seller would find acceptable;
  • selling a business is a huge distraction and typically hurts profits;
  • to finance the purchase the buyer will likely fire many long-term loyal employees; and
  • the seller may feel unimportant and diminished (loss of activity, prestige etcetera).

7.  The transition process is basically simple and consists of two (occasionally three) steps.  SBOs should:

  1. know what they’ve got;
  2. (if necessary) grow what they’ve got; and
  3. know their transition options.

7a.  Know what they’ve got.  Unless you know where you are now, it is hard to reach your destination.  SBOs almost never know how much their businesses are actually worth.  (A study SPARDATA conducted in 2010 found SBOs misjudge the value of their businesses by a median error of 58.9%.  Whatever number they think the business is worth, the actual number is more likely to be about 60% greater or 60% less.)  Two-thirds of the time SBOs overestimate the number, one-third of the time they underestimate it.  

7b.  Grow what they’ve got.  Two-thirds of the time the valuation concludes the business is worth less than the SBO thought.  To get to the number they want, SBOs must either ‘grow what they’ve got’ or else save enough to make up the difference.  Either way SBOs need time which is why the transition process should start at least 5-10 years before the SBO wants to transition to a more passive role – to ‘hand over the keys’.

7c.  Know their transition options.  There are six ways SBOs transition to a less active role:

    1. sell to an outsider
    2. sell to an insider (aka a ‘management buyout’)
    3. ESOP (but only if annual cash flow > $1MM and balance sheet is clean)
    4. private equity recapitalization (but only if annual cash flow > $1 MM)
    5. give away the business (usually to a son or daughter), or
    6. forced liquidation (aka a ‘fire sale’).