Stats Show Entrepreneurs Great at Building Wealth, Awful at Monetization

By Scott Yoder
Published: October 3, 2016 | Last updated: March 21, 2024
Key Takeaways

Private business owners: most of the statistics are not in your favor. Here’s how you can break out of this cycle.


The ensuing compilation of statistics demonstrates the typical progression private business owners experience and highlights that even though entrepreneurs are great building wealth on paper, they struggle with monetizing this wealth, and offers up some explanation on why this is occurring.


The Stats

Statistic Set #1

  • 73% of owners believe business ownership provides the best way to create wealth.[i]
  • Self-employed have a 362% higher net worth than employed.[ii]
  • The story begins with passionate entrepreneurs who seize an opportunity to create, manage and grow their own business and are often driven by, among other things, the vision of wealth that business ownership can create. In fact, just recently I was advising a buy-side client who was willing to take on significant risks, but, if successful, he will change his family’s wealth paradigm. As a result of owners willing to take these types of risks, together with their vision, dedication and perseverance, are rightly rewarded financially.


    Statistic Set #2

  • At least 70% of an owner’s net worth is tied up in their private company ownership.[iii]
  • As the years go by, the owner continually reinvests their profits back into their business by purchasing better equipment, expanding operations, investing in technology, hiring more and/or better employees, paying down debt, and storing enough working capital to maintain a strong balance sheet to satisfy creditors and to weather any down turns. By doing so, the potential transferable business value grows along with the owner’s compensation (in various forms), but not in the same proportion. Business value increases faster, due mostly to the value of the business usually being a multiple of the future benefit stream and because of the aforementioned reinvestments. Thus, an owner’s net worth is concentrated in their illiquid private company investment. There are owners that have been able to extract significant earnings from their private company and reinvest these earnings in external investments and, as a result, their net worth is much more diversified, but their private company investment is still their single biggest asset.

    Statistic Set #3

  • 96% of baby boomer business owners agreed that having an exit strategy was important; however, 87% do not have an exit plan.[iv]
  • 88% of business owners do not have an exit plan.[v]
  • As the owner contemplates transitioning out of the management and/or ownership of their company due to approaching retirement age or for various other reasons, you would expect the normal course would be to start strategically planning and preparing to maximize the monetization of their largest investment and to achieve a broader scope of objectives revolving around their ownership. Unfortunately, this isn’t the case; most owners skip this strategic planning and preparation phase and jump head first into the sales or transfer phase, ignoring management or family dynamics, market timing, value enhancements, wealth planning, tax planning and the various other attributes that strategic exit planning delivers.

    Statistic Set #4

  • 70% of M&A professionals surveyed said that business owners are minimally prepared or not prepared at all to sell or transfer their companies.[vi]
  • A typical business owner misjudges the value of a company by 59%.[vii]
  • The primary reason for deal termination is seller’s unrealistic value expectations.[viii]
  • 75% of business owners who sold reported having post-exit remorse.[ix]
  • Due to the lack of planning and preparation, a majority of owners are faced with the harsh reality that their perceived succession plan isn’t valid; their company isn’t worth what they thought in the marketplace and the alternative exit channels that existed are now gone as a result of their shortened time horizon. The owner’s frustration often continues throughout the sales or transfer process with the most common distraction and anxiety occurring during the due diligence and contract process. In addition, the entire process will potentially last up to 18 months versus what could have been a six-month period had the owner prepared in advance.

    Root Causes

    The primary reason given by business owners on why they haven’t prepared or planned for their transition is that they are too busy running and growing their business. The secondary reason given is because they don’t know where to turn.[x] Owners’ typical trusted advisors have limited understanding of strategic exit planning, so when owners do turn to these advisors they aren’t prepared or equipped to properly counsel their clients on this matter. Consequently, they typically refer the client to the “known” specialized resources in this space – often the investment banker. While the banker provides a critical and important role in an external exit, they aren’t equipped nor compensated to determine an owner’s long-term financial needs, determine the ideal exit channel, implement long-term value enhancements, create a strategic tax plan, etc. They are hired to sell the business, externally, in its current form, at the highest price they can achieve in the marketplace – and so the cycle continues.

    Stopping the Cycle

    Rob Slee, a pioneer of finance for private companies, states, “Ninety percent of owners are determined to continue lifestyle behaviors that do not promote company value creation. Of the 10% that are amenable to change, only 10% of these owners will change. So, 1% of the owners will change.”

    For owners who want to be part of the 1% and are willing to invest in planning and preparing for a successful transition, we suggest they start the process at least two years prior, but highly recommend five years as the aim is to position the owner and their company at a constant state of readiness and agility so, when the market timing is right, they can capitalize.

    A 30,000-foot view of the critical steps:

    1. Articulate your business, personal and financial goal.
    2. Assemble a collaborative multi-disciplined team of experts.
    3. Develop and implement an actionable plan.
    4. Monitor the plan and the markets and adapt when necessary.
    5. Execute the transition when the timing is right.

    The first step generates the necessary framework to develop a meaningful plan and acts as the underpinning foundation to guide you along the way. The second equips you with the market knowledge and resources to vet and convert your goals into a realistic and effective actionable plan. The third step provides you and your team with the road map and efficiently converts your plan into results. The fourth step ensures the value enhancements are realized and the plan is adapted as the ownership, company and markets evolve, along with providing a timing indicator. The fifth step is executing the transition when your company, personal conditions, and the markets are all in alignment.

    [i] The Guardian Life Small Business Research Institute, 2011

    [ii] Federal Reserve Study – Survey of Consumer Finances – 2007 with update in 2009

    [iii] 20 Years of personal experience and consensus of advisors to middle

    market companies

    [iv] 2008 survey of closely held businesses “America’s Entrepreneurialist Generation:

    Exit Planning and the Baby Boomer Age Wave” conducted by CMI Research

    [v] The Sellability Score Business Owner Survey Global Results Fall 2012

    [vi] CoreValue Software 2013: Survey of M&A Professionals

    [vii] MassMutual Business Owner Perspectives Study, 2011

    [viii] International Business Brokers Association | M&A source | Pepperdine

    Private Capital Markets Project, Market Pulse, Quarterly Survey Report, Q4 2012

    [ix] Exit Planning Institute – Pricewaterhouse Coopers (PwC) survey of former business

    owners who sold their companies

    [x] 2008 survey of closely held businesses “America’s Entrepreneurialist Generation:

    Exit Planning and the Baby Boomer Age Wave” conducted by CMI Research

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    Written by Scott Yoder

    Scott Yoder
    Scott Yoder, CEPA, CMAA, CPA (inactive) is a Partner with Strategic Equity Advisors, LLP (Smolin Lupin affiliate); a boutique merger and acquisition advisory firm specializing in divesture strategies for owners of closely held companies. In this role, I collaborate with ownership, their families, and their advisors to develop and implement strategies that maximize wealth upon transfer in accord with overall ownership objectives.

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