Our fourth podcast- The 2023 National State of Owner Readiness Report
Here is our fourth podcast, in which our AI guests discuss the Exit Planning Institute Report called,
The 2023 National State of Owner Readiness Report examines the preparedness of business owners for exiting their companies, comparing data from 2013 to 2023. Let us know if you would like the paper; we will happily email it to you.
2023 National State of Owner Readiness Report
Executive Summary:
The 2023 National State of Owner Readiness Report, building on a decade of research by the Exit Planning Institute (EPI), reveals significant advancements in business owner awareness and preparation for exiting their businesses compared to the initial 2013 survey. While business owners are more educated and seeking outside advice, crucial gaps remain, particularly in personal and estate planning. Younger generations (Gen X and Millennials) are driving much of the progress, showing greater inclination toward formal planning and a "built to sell" mentality. The report highlights the growing "$14 Trillion Opportunity" presented by the impending wave of business transitions as baby boomers reach retirement age. The report emphasizes that exit planning should be "present tense" and integrated into overall business strategy. The report uses "The Three Legs of the Stool" (business, personal, and financial) as a framework to analyze readiness.
Key Themes and Findings:
Increased Awareness and Education:Business owners are significantly more aware of exit planning and available options compared to 2013. "In 2023, 70% report being aware of all their exit options versus only 34% in 2013."
Google search results for "exit planning" have exploded, and major financial institutions are now actively involved in supporting small to lower middle market business owners.
"In 10 years, business owners have gone from poor preparation and misinformation about the importance and impact of exit planning to improved readiness."
Improved Planning (But Gaps Remain):More business owners are seeking outside advice. "Today, 68% of respondents shared they had sought outside advice on the exit," compared to 38% in 2013.
Formal business valuations have increased dramatically. "Formal business valuation within the last two years has improved from only 18% in 2013 to 60% in 2023."
Personal planning remains a significant area for improvement. "In comparison, 41% of the 2023 business owner respondents stated they had a formal, written plan for what they would do after selling their company and 50% said they had an informal plan they had thought through. Leaving only 9% of business owners in 2023 that had no plans at all, which is a complete shift in business owner perspective and planning."
Estate planning is lagging behind financial and business planning. "Only 30% of the business owner respondents indicated they had a written estate plan and only 24% had a written and updated will".
Generational Differences:Younger owners (Gen X and Millennials) are more proactive and embracing exit planning. "Younger owners demonstrate a greater inclination towards embracing exit planning compared to baby boomers."
"Millennials have entered the market and show even greater aptitude for exit planning than Gen X and baby boomers."
Millennials and Gen Z are more likely to have written plans and a "built to sell" mentality. "The three younger generations studied, Gen Z, millenials, and Gen X, reported that 49% had written personal plans, 50% had written company plans, and 63% had written personal financial plans."
"52% of millennials indicated they would invest in another business after exiting their current company."
Baby Boomers scored significantly lower on written plans compared to other generations. "Only 13% of boomers indicated they had a written personal plan, 15% voiced they had a written company transition plan, and 35% shared they had a written personal financial plan."
The Shifting Role of Advisors:Financial advisors have become the most trusted advisor, surpassing CPAs. "There has been a significant shift in who owners see as their most valued advisor. Financial Advisors have become the most trusted advisor moving from fifth to first. The CPA has moved from first to third most trusted."
The importance of a value growth advisor, focused on business improvement, is highlighted.
Family Business Dynamics:A significant percentage of businesses are family-owned or controlled. "68% of responding business owners’ businesses were completely family owned."
Second and third-generation owners are more inclined to consider internal exit options. "Whereas 82% of the second-generation business owners favored an internal exit." compared to 60% of first-generation owners.
"53% of them stated both groups were aware of their plans. The owner respondents also reported they held regular family meetings."
The $14 Trillion Opportunity:The impending transition of baby boomer-owned businesses represents a massive wealth transfer opportunity. "73% of privately held companies in the US would like to transition within the next 10 years equating to a $14 trillion opportunity."
Readiness Self-Assessment vs. Reality:The report acknowledges that owner-reported readiness may not align with objective assessments. "Readiness must be determined from the buyer’s perspective not the current owner’s perspective..."
Importance of Attractiveness and Readiness:"The value of a business is determined by both its attractiveness to a potential buyer and its readiness to transition."
Contingency Planning:"50% of all exits are forced." Due to "death, disability, distress, disagreement, and divorce."
The Three Legs of the Stool Analysis: The report emphasizes a holistic approach to exit planning, using the "Three Legs of the Stool™" framework:
Personal Leg: Focuses on the owner's personal goals, values, and plans for life after the business. Includes elements like written goals, action plans, personal purpose, readiness assessment, risk assessment, and an updated will and estate plan. The report showed that for written plans, "The top three elements included: 1. Written Goals and Objectives, with 49% of respondents selecting this was within their plan 2. Written Action Plan, with 40% of respondents listing this within their plan 3. Personal Readiness Assessment, with 35% of respondents including this component in their personal plan"
The question "Who are you outside of your business?" is critical.
Financial Leg: Addresses the owner's financial readiness for exit, including wealth goals, understanding the "Wealth Gap," and having a sound financial plan. "70% of owners in 2023 indicated they needed to harvest the value of their business to support their lifestyle post-exit."
Business Leg: Concerns the business's readiness to transition, including its value, attractiveness to potential buyers, and risk mitigation strategies. Includes elements like market attractiveness assessment, business readiness assessment, business risk assessment, recasted financial statements, business valuation, value gap analysis, value enhancement plan, and exit option analysis.
Recommendations:
For Business Owners:
Integrate exit planning into their overall business strategy. "Exit planning is present tense."
Actively manage their wealth holistically.
Identify and understand the value of their company.
Concentrate on both value and income generation.
Establish a strong advisory team with CEPA advisors.
Remember to integrate personal and financial planning with business planning
Recognize and address their wealth gap
For Advisors:
Collaborate with other advisors to provide comprehensive support. "Undoubtedly exit planning is a team sport."
Adopt a common framework, such as the Value Acceleration Methodology.
Take a value, not just income, approach to their advisory practice.
Demographics of Respondents:
1,162 business owners across the US.
Representing all generations, but the largest group is Generation X (39%).
Geographically diverse: Northeast (36%), South (32%), West (19%), Midwest (13%).
Annual revenue: 35% below $5 million, 23% between $5-$25 million, 13% over $100 million.
Industries: Construction (17%), Finance and Insurance (12%), Professional, Scientific, and Technical Services (9%).
68% completely family-owned.
Conclusion:
The 2023 National State of Owner Readiness Report demonstrates progress in exit planning awareness and preparation, driven in part by younger generations. However, significant opportunities remain to improve personal and estate planning and to ensure that business owners are truly ready to transition on their own terms. The report underscores the importance of a holistic approach, a strong advisory team, and proactive planning to maximize value and achieve a successful exit.
You can listen to the podcast by clicking here:
Email us if you would like the paper.
For personalized guidance tailored to your unique situation, contact Diversified Asset Management, Inc. at info2@diversifiedassetmanagement.com or (303) 440-2906.
Robert J. Pyle, CFP®, CFA, AEP®, CEPA® founded Diversified Asset Management, Inc., in 1996 to provide personalized, comprehensive wealth management services to successful individuals, families, single women, and business owners. His specialty is addressing the complex financial needs of self-employed professionals, corporate executives, and small-business owners. Our disclosure can be found here. The views, opinion, information, and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc. Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting, or tax advice.