Why 99% of Business Owners are Leaving Money on the Table

From starting your business to running it, growing it and finally setting it up for a successful transition when the time comes, there are a host of challenges to overcome … and only a handful get it all right. Most end up leaving a lot of money on the table, one way or another.

By Homer S. Smith IV, CFP®, CBEC®

published 9 July 2021

in Features

(Image credit: Getty Images)

What if I told you 99% of all business owners are leaving significant wealth on the table or are at risk of seeing their wealth disappearing due to key mistakes and missed opportunities? Research indicates it's an unfortunate truth. Even more troubling is that this was the reality even before the COVID pandemic magnified many glaring issues that lead to these struggles.

The good news is there are solutions to dramatically improve your chances of being in the successful 1%.

While unexpected events can cause unique problems for businesses, here are three key challenges impacting business owners every day:

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Lack of operational effectiveness
Inability to grow consistently
Unsatisfactory transition or sale of the business

Let’s examine each of these challenges in turn and see what business owners can do to try to beat the odds and overcome them.

Lack of Operational Effectiveness

When we find a business that is not easy or fun to run, it may be overly dependent on the owner. This often results in a business that lacks a solid foundation for predictable profits and cash flow. Below are a couple consistent issues we see while working with owners at this stage.

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The most common issue is a lack of key systems and processes allowing the business to run smoothly, make the work repeatable, and make it easier to onboard new staff.

Another major issue we often see is a lack of financial reporting. Many businesses have difficulty producing monthly or quarterly balance sheets, and/or income and cash flow statements. Without key financial information, it's difficult to consistently make good decisions on how to best utilize resources of the company.

Quite often, these same businesses that lack operation effectiveness run into legal and liability risks. This could be as simple as not having an updated operating agreement or buy sell agreement in place, or a larger concern, ongoing lawsuits and litigation due to a lack of or poor procedures.

All of these issues raise the risk to your private business and can lead to lower valuations.

Inability to Grow Consistently

Businesses that have a solid foundation for predictable profits and cash flow may still not be growing at a pace that assists in working toward aspirational goals. What's missing?

Businesses that consistently fail to grow may not have a strategic plan in place. Often the vision/mission/purpose and values of the firm are not well-known or practiced across the organization. If there is a strategic plan, it may not be in sync with the owner’s personal wealth plan. There may be high-level goals the company aspires to achieve, yet they are not necessarily aligned with the values and purpose of the company, negating required weekly actions to reach these goals.

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Another hot topic related to lack of growth is the management team. This can vary from a lack of development in the team members, to an absence in communication from the owner conveying values/goals of the business. It is essential the team knows what role they play and the relationship to the company goals, and how they win if the company wins.

While the company may have a solid footing, the above issues can lead to frustration within the organization as they regularly fail to achieve growth.

Few Owners are Highly Satisfied with Their Exit

The challenges business owners face continue to grow as they look to the next stage of their life. In research from BizBuySell, only 20%-25% of businesses that go to market any given year complete a transaction— this means only 1 out of every 4 to 5 business owners raising their hand to sell their business, do so successfully. And according to a survey by AES Nation, only 12% of those who complete a transaction end up satisfied with the result. Meaning only 2%-3% of business owners who begin the process are genuinely happy with the outcome.

The reason so few businesses complete owner-satisfied transactions is a lack of corporate and personal pre-sale planning.

On the corporate side, it usually comes down to the first two challenges addressed earlier: having a foundation for predictable profits and cash flow, followed by the ability to reach sustainable growth.

On the personal planning side, the key is knowing the value of the company to meet the wants and needs of the owner as well as minimizing the tax impact and ensuring net profits of the sale are maximized and addressing the wealth transfer and protection issues of the liquid wealth beforehand.

Addressing These Challenges

The first step business owners need to take is to examine their business through the eye of the buyer. This allows for more objectivity to key issues.

We do this by taking owners through a review process of the 18 drivers of growth and value in their business. From over 25,000 assessments completed through Core Value, business owners found the average value gap is over $2.5 million for a $10 million revenue company. Meaning the average business owner leaves significant value on the table.

Many of these issues that are creating these value gaps are related to risks inherent in business, preventing business owners from creating a solid foundation for profits and cash flow. Moving beyond this initial state where we are capturing latent value available by addressing the risks within the business, we see gaps more related to inconstant growth and differentiating your business from competitors. In later stages of a business, it's more about identifying gaps that make it more difficult to defend the equity value of the company, then implement changes to capture growth and possible value.

For owners ready to transition their business, creating an essential systematic approach to ensure you are financially and mentally ready for your exit is our priority.

Personal pre-sale planning is an often overlooked step, and it is a big factor in why few owners are highly satisfied. The next stage is determining available options and financial implications for each option, as decision points for the best solution for your business.

With these steps in place, it is possible that you can be among the top 2%-3% of owners who are extremely satisfied with their exit transitions.

The 1% Problem

We have already determined there are many challenges private business owners face daily.

If you've navigated through all challenges successfully, created a legacy through the transition of the businesses or liquid wealth created from the business sale, you aren't out of danger yet. Research by The Williams Group indicates 70% of wealth transfers fail to make it past the second generation. Combined with just 2%-3% of owners highly satisfied with their exit, we end up with fewer than 1% with wealth they created through their private business, creating a lasting family legacy.

The Williams Group found that the most common reasons for wealth failing to survive multiple generations include a lack of communication and trust between generations, lack of preparedness of heirs to deal with wealth they receive, or the lack of a clear mission and purpose for the family wealth to serve as a road map for lasting harmony.

Because a business owner’s personal wealth plan is heavily tied to their business, it is important to have a similar process around a strategic company plan.

I suggest you run an exercise determining your values, goals and purpose outside the company. Develop a plan to address your key money concerns around building and preserving wealth, mitigating taxes, transferring wealth taking care of your heirs, protecting your assets from being taken through litigation or divorce, and helping you magnify your charitable intent. This must go beyond strategy and governance to not only understand everything and everyone that is important to you, but also who and what will be impacted by your financial decisions. By completing this process, you will increase the chances your family is prepared to preserve your wealth for generations to come.

Usually this is a team approach where you work closely with your trusted advisers who regularly review the strategies you have implemented to make sure they are still on track to meet your expectations and identify if there are gaps or opportunities that need to be addressed. This process helps keep you on track to get what you want out of life – taking care of your loved ones, the causes you care about, and potentially making an impact on the world.

Disclaimer

Homer Smith is a private wealth adviser with Konvergent Wealth Partners, a registered investment adviser, and separate entity from Kiplinger.

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Disclaimer

Homer Smith is an Investment Advisor Representative with Konvergent Wealth Partners. Investment advice offered through Integrated Partners, doing business as Konvergent Wealth Partners, a registered investment adviser.

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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A private wealth adviser with over 19 years of experience, Homer Smith of Konvergent Wealth Partners has dedicated his practice to working with business owners and families of wealth with complex financial planning needs. His mission is to simplify his clients' lives by quieting the noise in their personal and business lives, allowing them to focus on their purpose and goals. Homer enjoys spending time with his wife, daughters and their dogs – especially outdoors as they build their homestead.