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      Wealth Management Insights January 8, 2025

      Building a wealth transition plan that does not leave money on the table

      By LaToya Williams, Old National 1834 Wealth Advisor

      LaToya Williams.jpgNearly 75% of privately-held businesses will be positioned for transition or exit within the next 10 years. Only 30% of businesses will successfully transition to the second generation, only 12% to the third, and very few make it to the fourth generation.

      This data suggests a third-party sale, management buyout, or ESOP (Employee Stock Ownership Plan) exit could potentially create sizeable liquidity for an owner. Generally, 80% of an owner’s wealth is tied to the value of their business. However, research reports only 20-30% of businesses that sell, sell for that full value. Which means that business owners might be leaving a significant amount of money on the table.

      Transition strategies
      Approximately 99% of owners polled agree that having a transition strategy is important for their personal finances and business success. However, few have a documented plan in place, and even fewer have formed a transition advisory team.

      While 75% of privately-held businesses are considering a voluntary transition or exit, 50% of business transitions and exits in the U.S happen involuntarily by way of one of the Five D’s:

      • Death
      • Divorce
      • Disagreement
      • Disaster
      • Disability

      Moving from ‘successful’ to ‘significant’
      Successful businesses meet the current financial needs of the owner and employees while providing a quality service to their customers. To effectively transition or exit a business, an owner should consider moving from successful to significant.

      According to the Exit Planning Institute, a leading educator in the business transition and exit planning space, “A significant company is one that is valuable, transferable, ready, and attractive at any point, where the business owner’s business, personal, and financial goals are aligned.” Designing significance means understanding that business transition and exit planning are present tense -- it’s the work the owner and employees do every day to make the business essential to their customer base while consistently working to increase value.

      Having a north star and goals provides short term clarity of forward motion; however, every business needs a plan that is grounded in systematic action to manage value and embody significance. To do this, an owner must start by identifying the current value of the business. Conducting an independent business valuation annually provides real data of the current value of the business and may highlight improvements that could be made to increase the future value.  Once the value is obtained it needs to be protected to lessen the potential of disruption from unforeseeable events.

      A legal framework and owner independence
      Establishing the appropriate legal framework and insurance protects the business against the 5 D’s. Owners also need to consider things like customer concentration, economic and supply chain disruptions, and the potential of personal or financial risk such as personal lawsuits and high debt. With these risk mitigation strategies completed, the focus should turn to building value.

      A business that is valuable, transferable, ready and attractive operates without the owner. If the business is owner dependent, the buyer would need to retain the owner to maintain the current profits. Reducing owner dependance while simultaneously increasing cash flow builds value. It also increases the multiple that the private capital market uses to assess the value of a business. When the value has been identified and protected, and strategies have been implemented that consistently result in increased cash flow, the business owner is positioned to sell for full value.

      The first step to creating significance is knowing the value of your business. If you don’t have a current business valuation, the time to do so is now.

      To learn more about charting a customized course to create an optimal financial future – for you and/or your organization – contact LaToya Williams at LaToya.Williams@oldnational.com.

      * Investment instruments utilized by 1834 are not insured by the FDIC nor any other government agency, are not deposits or other obligations of Old National Wealth Management, Old National Bank, its parent company or affiliates, and involve investment risk including the possible loss of principal invested.

       

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