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Why Building Value & Transition Planning Matter

When it comes to business transitions, the stakes are high.
Why Building Value and Transition Planning Matter
July 27, 2018 at 12:00 AM
by Dunnington Consulting

The community of owners must realize that transitioning a business is a high-stakes and, for many, once-in-a-lifetime endeavor whose successful execution requires significant focus, action, and time.

Doing it right has significant benefits. For many owners, their businesses represent the vast majority of their wealth. For the average middle market business, which we define as those with sales between $5 and $100 million and that hold a market value of $8.5 million, successfully transitioning the business means the difference between having $10.6 million in pre-tax wealth at transition and having $2.1 million in wealth. Even at an aggressive 6 percent yearly return rate, the difference in pre-tax income is $510,00 ($637,000 vs. $127,000) per year.

The consequence are even more significant for the micro market, which we define as those businesses that do less then $5 million in sales per year, with an average business value of just over $300,000. Most of these businesses are owner operated, and the owner derives almost all his or her income from the business. Roughly 5.7 million (94 percent) of those 6 million privately held businesses fall into this category. If 80 percent of an owner’s wealth is locked up in the business, successfully monetizing the business asset represents the difference between having $400,000 at transition and having $100,000.

(content is courtesy of Exit Planning Institute, Owner Readiness Study – Twin Cities)

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