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An estimated $3 trillion dollars will be “left on the table” by small business owners due to failure to plan their business exits

Business Brokers Should Know SBA 7a Loan Business Acquisition Criteria

My previous blog posting, Reconstructing Avery’s $10.4 Trillion in Business Transfers, details the assumptions and calculations supporting my estimate that the total business valuation for small businesses (which I define as 49 or less employees) is just short of $4 trillion dollars ($3.775 trillion based on my calculations).  That valuation number assumes all small business owners do whatever is necessary to prepare to have a saleable business.  We all know that is not the case.  In fact, an ROCG study of 502 respondents with revenues between $1 million and $100 million found that only 9% had a formal, written transition/succession plan.  For the businesses that interest me – 49 employees or less, I’d guess the existence of formal exit plans may be under 5%, possibly closer to 1%.

It is generally accepted that only 20-25% of small businesses ever sell.  Some would argue the true number is not even that high.  The number one reason small business are not saleable is the business owner’s failure to plan for the sale of their business.  Most owners don’t even realize the necessity to plan for their business exit.  Many think selling a business is like selling a home, but they couldn’t be more wrong.  They have no idea of the number of obstacles they might face.  In fact, in future posts, I will detail and address 66 obstacles I’ve identified that owners must be prepared to address and overcome or minimize.

So, here’s the really bad news that can be deduced from all these statistics.  Assuming only 20-25% of small businesses ever sell and the value of all small businesses (49 or less employees) is approximately $4 trillion dollars, one can deduce that 75-80% of all business owners are likely to leave a total of approximately $3 trillion dollars on the table through failure to plan for their business exits.

I am very interested in your feedback and comments.  Do you agree with the assumptions? What can we do about it?  How can we reach small business owners with this distressing information?



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5 Responses to “An estimated $3 trillion dollars will be “left on the table” by small business owners due to failure to plan their business exits”

  1. pfpcronin says:

    Great post Jim. I think your assumptions are right on. I have heard that the chance a business will actually sell is low single digits. As to getting the message out there – I suggest more short webinars/videos on the subject, recording them and then releasing them to LinkedIn, Facebook and Titter.

  2. Tom Gledhill says:

    Jim, there are a number of business owners that run a “Lifestyle” business and they take most (or all) of the profits out rather than re-investing in the business. Some of these have the opportunity to grow the business and increase its value but they would rather take the money out. Then there are those businesses that are really “just a job” to the business owner. They may employ a few people but when they retire the business is gone. These businesses comprise the bottom of the “business pyramid” and they typically have nothing to sell.

    In my opinion if a business owner has built the business to about $2 million in revenue and about 20 employees the company should be salable IF the company has good cash flow and the owner has reasonable expectations.

  3. jimstauder says:

    Tom, I respectfully disagree.

    According to this article, “What 2012 Business Sale Trends Mean For 2013”, http://bit.ly/YGNIdZ, there were 5,689 businesses reported to BizBuySell as being sold last year. The article also says the median cash flow of businesses for sale was $88,902 while the median sale price was $160,000. Using those statistics (assuming the average sale was $160,000, the same as the median), BizBuySell’s reporting would suggest about $910 million in business sales in 2012 (reported to them) – almost $1 billion.

    So there are a lot of closings occurring on businesses with less than 20 employees and less than $2 million in revenues.

    I believe if owners would identify and address or minimize the obstacles they face to a successful sale, there would be buyers for most small businesses. It surely helps a lot if they can get their seller’s discretionary earnings to exceed $100,000. Unfortunately, owners do not realize the need to plan for their business exit and approximately 75% are never sold. This blog will soon begin to identify and address 66 obstacles to a business sale.

  4. Thanks for the article Jim,

    I have been thinking about the concept of what I call ‘wealth destruction’ that occurs when businesses simply close their doors. Assuming that they had an enterprise value, that is, it was not a bankruptcy, the list of losers only starts with the owners. It extends to the employees, the landlord, the suppliers, the customers, the municipality, other tax beneficiaries,etc. Even worse, in many cases no small business reopens to fill this void. It is filled by multi-nationals who remove the bulk of the economic benefit from the community. If there is a new small business that does open to fill this void, there is increased cost to consumers, and much higher risk to the start-up owner than had they purchased the previous business.

    Anecdotaly, based upon the number of businesses to whom we have spoken, but did not engage us and subsequently simply closed up shop, I would put the number in our city alone as well above 100, and a total loss of enterprise value to owners of more than $10m – assuming only $100k per business.

    This is an insidious community and small business killer that will get worse as the baby boomer bulge gets older.

    Some of it is planning, but some is apathy, ignorance, uncertainty about liklihood of a sale, and various other reasons.

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