U.S. Trust Survey Finds Entrepreneurs Take Charge of Their Future but Aren’t Prepared When Life Doesn’t Go According to Plan
Nationwide Study Looks at Challenges Business Owners Face Over the Lifecycle of Their Business
Business owners say the most compelling reason for owning a company is to take control of their own destiny, yet the fate of their business and financial security is left to chance by not anticipating potential disruptions at every stage, according to a new survey published today by U.S. Trust. The findings show that entrepreneurs worry most about business and personal risks that are within their control but surprisingly they neglect to address.
U.S. Trust surveyed 248 high net worth business owners across the country about their experience from start up to expansion to exit. The findings provide insight into the makings and mindset of entrepreneurs and challenges they face at different stages of the business.
For most entrepreneurs, money issues are the most challenging aspect of starting and funding a young company. While obtaining capital was the No. 1 hurdle cited by founders overall, millennials say their biggest struggle is protecting personal assets from business risks. One reason may be that millennial entrepreneurs used external funding sources to a greater degree and feel accountability to outside investors and lenders more than founders before them did. Another reason is that few owners have basic personal protection from business losses and liabilities.
Half of millennial entrepreneurs, compared to 31 percent of founders overall, relied on external capital to fund their company. Nearly two in five took a cash advance on their credit cards or personal bank loan.
Most business owners don’t have a plan to respond quickly to threats that could affect ongoing business operations and ultimately diminish the value of their business. These include allegations of fraud or negligence (70 percent), an employment law suit (83 percent), loss of credit or access to capital (81 percent), and use of a back-up server or secure data storage to protect company records and files (59 percent overall and 73 percent of millennials).
- Personal assets are at risk as well; 44 percent of owners overall, and 65 percent of millennials, don’t have an umbrella insurance policy to protect personal assets, including their home and personal savings, and 50 percent haven’t named a power of attorney for financial assets.
“Owning a business is an exciting and rewarding journey, full of peaks and valleys that entrepreneurs tend to thrive on,” said Keith T. Banks, president of U.S. Trust, Bank of America Private Wealth Management. “Young entrepreneurs are starting companies at a younger age than their predecessors, building their careers and wealth on a path that’s uniquely their own. Yet all business owners share a common trait: the bulk of their wealth is often tied up in their companies, and the time, energy and resources they put into it too often exceeds the value they get out of it because of simple planning mistakes throughout the company lifecycle.”
Moving up: New challenges, upcoming deals for growing businesses
U.S. Trust found that once business owners are established and move into the growth stage, their biggest challenges shift to managing people (No. 1), managing cash flow (No. 2), and keeping pace with technology and market changes (No. 3).
When asked about their top 10 concerns, owners of smaller companies put compliance with government regulations first on the list. The owners of middle-market and larger businesses worry most about uncertainties in the economy.
For now, business owners seem confident. This year, they plan to increase or maintain employment levels (84 percent), wages (89 percent), capital spending (79 percent) and contributions to employee retirement plans (81 percent). Seventy-nine percent also will match or increase charitable giving levels, maintaining their fervent commitment to giving back, which is characteristic of business owners.
Another sign of confidence is the large percentage of business owners planning to raise capital to fuel further growth. Sixty-two percent of all business owners and 87 percent of millennials, are planning some type of business or financial deal within the next three years. Millennial owners say they are considering a merger or acquisition (44 percent) or private offering (29 percent), while at least one in five are hoping for an initial public offering or secondary offering.
Moving on: Generational differences approaching the exit
When retired business owners were asked for their best career advice, the top response was, “Take ownership of everything you do.” That should include owning the terms of an exit. U.S. Trust found that current owners may have a vision for leaving their company, but not a clear plan or one that accounts for unforeseen changes in circumstances that could affect the terms, timing and value.
Fifty-two percent of all owners and 65 percent of millennial owners plan to exit or make a change in ownership over the next three years.
Seven in 10 business owners don’t have a formal exit strategy to help ensure a smooth succession or maximum market value.
For 39 percent of all owners surveyed, exiting the business means retiring and quitting work, whereas millennials are eager to start their next venture, including starting a new business (27 percent) or co-owning another business (18 percent).
“Successful business owners have a characteristic take-charge attitude, and they rightly spend time worrying about what’s within their control,” said Karen Reynolds Sharkey, U.S. Trust’s National Business Owner Strategy executive. “Business succession and what-if, worst-case scenario planning may seem like an unproductive use of a busy owner’s time today. Yet business owners underestimate how much control they can actually have with a proactive plan and the right tools to protect their interests and that of their families and other business stakeholders.”
The survey found that business owners face risks and potential disruptions that they or their business may not be prepared to handle well or quickly, including:
A claim to ownership of business assets or income in the event of a divorce or dispute among heirs (82 percent).
Loss of a key account, client or deal integral to the company’s success (74 percent).
Disruptive event in the market or by competitors (76 percent).
Theft or breach of intellectual property (72 percent).
- Unexpected death, illness or disability of one or more owners or family members in line of succession (70 percent).
Making a difference
The survey suggests that business owners’ motivation to take charge of their future includes wanting to make a positive and meaningful difference in the world. Sixty-eight percent of business owners come from families that stress the importance of giving back to society, and 43 percent see their business and the jobs they create as an important way of doing so. In fact, 44 percent believe that small businesses and start-ups are more effective than the government, nonprofits and large corporations at creating economic opportunities and a higher standard of living for the most people.
Ninety-five percent of business owners actively support nonprofit organizations and social causes through either the mission of their companies, work on behalf of a charitable endowment or foundation, or service as a board member or trustee for a nonprofit organization. Ninety-two percent of business owners surveyed are currently serving on at least one nonprofit board, and 39 percent serve on three or more.
Detailed findings from U.S. Trust survey of high net worth business owners can be found here.
U.S. Trust’s survey of 248 high net worth business owners is part of the larger 2017 U.S. Trust Insights on Wealth and Worth® survey, a nationwide survey of 808 high net worth and ultra high net worth adults with at least $3 million in investable assets, not including the value of their primary residence. The survey was conducted online by the independent research firm Phoenix Marketing International and completed in February 2017. Asset information was self-reported by the respondent. Verification for respondent qualification occurred at the panel company, using algorithms in place to ensure consistency of information provided, and was confirmed with questions from the survey itself.
U.S. Trust, Bank of America Private Wealth Management is a leading private wealth management organization providing vast resources and customized solutions to help meet clients’ wealth structuring, investment management, banking and credit needs. Clients are served by teams of experienced advisors offering a range of financial services, including investment management, financial and succession planning, philanthropic and specialty asset management, family office services, custom credit solutions, financial administration and family trust stewardship.
U.S. Trust is part of the Global Wealth and Investment Management unit of Bank of America, N.A., which is a global leader in wealth management, private banking and retail brokerage. U.S. Trust employs more than 4,000 professionals and maintains 93 offices in 31 states. As part of Bank of America, U.S. Trust can provide access to a broad range of banking solutions for individuals and businesses, and an extensive retail banking platform.
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