Today, all owners face three significant headwinds that increase the difficulty of a successful business exit. One is our flat economy—today and for the foreseeable future. The second is the substantially higher tax bill that’s due upon the sale of a business. And last, but not least, is the long-term mediocre investment climate that depresses the amount of income owners can expect from their sale proceeds and other investments. Combined, these three headwinds wreak havoc on an owner’s ability to cross the finish line at all, let alone as they originally planned.
Today, let’s look at how the first of these headwinds affects your efforts to leave your business in style and what actions you can take today to minimize their effect.
Headwind 1: The Economy Just Ain’t What It Used To Be
Some may object to describing the state of the U.S. economy as “stagnant,” but compared to pre-Great Recession growth rates, it is anything but robust.
A growing economy, like the one we enjoyed from 1975 until 2000, undoubtedly helped your company grow—it, like other businesses, rose with the rising tide of economic growth. Conversely the economic doldrums that the U.S. has endured for the last 15 years exposes weaknesses in our companies and allow only the “best of class” to prosper. As a result, the great majority of businesses have retrenched; companies have not regained their former growth rates, especially since 2007.
Let’s assume that most businesses grow at a rate similar to that of the national economy as measured by the Gross Domestic Product (GDP). From 1975 to 2000 GDP grew an average of 6.35%, per annum. Consequently, most businesses doubled their revenue about every ten years.
Contrast that with the period from 2000 through today with GDP growth averaging less than three percent per annum. Applying the “Rule of 72” to that growth rate, businesses will double in revenue/profitability/value roughly every 25 years or so. When the economy and your customers’ revenues are growing at three percent or less per year, it’s very difficult to grow your business by an annual amount necessary to experience significant
increases in value.
Business Enterprise Institute, Inc. conducted a survey of business owners in which it asked owners to name what prevented them from moving forward with exit planning. The most common answer was that their businesses lacked sufficient value to enable them to attain financial security. In short, most owners need to grow value. When the economy “might be stuck in secular stagnation—a slump that is not a product of the business
cycle but a more-or-less permanent condition,” growing value requires increasing revenue much faster, and more sustainably, than general economic conditions foster.
To grow a business in today’s economy to a value sufficient to provide financial security for you when sold is an uphill ride into a strong headwind. And it’s likely to stay that way for the foreseeable future. As the Bain study documents, substantial revenue and earnings growth at the level most owners will need in order to exit in style, is only enjoyed by about 10% of middle market companies. Will you be part of that 10%? If you need to significantly grow the value of your business in order to attain financial security upon its sale and your exit, doing business as usual won’t cut it.
Mitigating Headwind 1
For most of us, building necessary value in the face of this headwind is not a one- or two-year project. We need more time to get where we are going: think five to 10 years more time.
Building value also requires thoughtful, targeted actions that directly impact cash flow. This economy challenges us to make our efforts more directed and focused. Creating a customized value building strategy for your company focuses your efforts and can shorten the time it takes to reach your value goals. It’s time to get started.
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