Recession exit strategies for middle-market entrepreneurs

Are we in a recession after? two consecutive quarters of negative GDP growth? Yes, say 58% of Americans, according to the July 2022 IBD/TIPP Economic Optimism Index’spoll.

James Jack is the Executive Director and Head of the Business Owners Client Segment at UBS.

But there could be a bright spot for entrepreneurs who own middle-market businesses and who have delayed plans for stepping away. Tough times concentrate the mind, and this volatile economy may make procrastination-prone clients receptive to the message that failing to create a succession plan puts them at risk of selling their enterprise for a fraction of what it is worth. Clients may also be more receptive to the message that late planning can limit their selling options, leading to deals with less-than-ideal terms or higher tax consequences.

Conversely, by planning early, and with a proper team, clients will have more flexibility to follow alternative exit routes or even continue ownership, oversight and organic growth as needed — even as the advisor, by understanding a client’s goals, priorities and business models, can better help provide guidance through the turbulent M&A market that some analysts see on the horizon.

IPO exit?
As planners guide clients through such discussions, they may find that some entrepreneurs have theirs heart set on an initial public offering, fueled by a vision of exiting their business at the height of its success. But this strategy is rarely the best route for middle-market business owners — especially in light of the dramatic drop in IPO activity in the first half of 2022, when only 92 companies went public, raising less than $9 billion in total, according to FactSet data, versus the 1073 companies that went public in 2021, raising a total of $317 billion. We advise clients that IPOs are not the only route to an exit.

Never too early
Whatever the preferred off-ramp, entrepreneur clients shouldn’t buy into the myth that succession planning is solely for older business owners. No matter how young a business owner is or how far away an exit seems, we see a lot of value in reminding them that good succession planning is good business planning.

A robust succession plan can not only help maintain business growth and reduce disruption as control changes hands — it can also foster a sense of common purpose for the business owner’s family and other stakeholders. A good succession plan can also prepare entrepreneurs for their next business venture if they’re so inclined and/or help them preserve their current enterprise’s pro bono legacy to the local community and beyond in its next iteration.

As with all major moves in business and in life, succession plans do not happen overnight. They take time to come together and your client will need your expertise and guidance from the start. We advise our clients to strategize early so they can drive an optimized plan instead of merely responding to the pressures of an imminent sale and due diligence process.


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