There is no denying the Baby Boom Generation (people born from 1946 to 1964) has made a significant impact on society. From infancy on, Baby Boomers have changed perceptions on everything from child-rearing to retirement. These changes have helped boost the economy of every decade since the end of WWII. And now, the Boomers are about to have another impact, although this one may not be so positive.
70% of all businesses with more than one person on the payroll —nearly 4.2 million companies are owned by people who are age 53 or older. Couple that statistic with the one that tells us that, since 2011, 8,000 people turn 65 each day, and you have a pending business owner exit or transfer of epic proportions.
We have seen a stock market bubble, a housing market bubble, dot-com bubble, but there has never been an owner demographic bubble. This “age wave” is heading toward our economy like a tsunami gathering strength out on the ocean. And it will affect every small business owner for the next decade and a half.
As a business owner—Baby Boomer or not—this looming crisis presents both a dilemma and an opportunity. The crisis, of course, is will you see a profit when you are ready to transfer your business to another owner? The opportunity occurs when you start planning. Proper planning and obtaining the appropriate advice can help you capture and retain the wealth you’ve generated in your business. It can help you find the capital needed to close the transaction. But you must critically evaluate your business, try to keep the value of your business relevant; and ultimately create a team of experts to enable you to sell your business.
Why is this happening?
Before we delve into how you can ride this wave, we first must discuss why this perfect storm is amassing. There are three major forces at work affecting business owners:
1. The Market Cycle
The economy goes in cycles. We are experiencing a robust bull market, which favors sellers. But, like all market cycles, this momentum will not last forever. At some point, the market will make a downward turn, and buyers will be finding favor. Markets in decline often mirror the demands in the ascendancy, meaning, the higher they go, the lower they fall. This market has been unprecedented over the past eight years. Eventually, after a crash, the market rises, but there is no predictable time frame for a turnaround.
2. The Number of Businesses for Sale
Baby Boomer business owners are not the only potential sellers. 7,700 + companies owned by private equity firms are also available for sale. And business owners ten years younger than the youngest Baby Boomers will be seeking capital for growth initiatives are also on the market. These facts add up to a host of competition for retiring business owners. It will drive the prices of business down.
3. Lack of capital
There is not enough funding to satisfy all the sellers looking to transition. If every business owner in the Baby Boomer demographic were to sell their business, the capital required to close all those transactions is over $10 trillion. The private equity available to complete these transactions is roughly $535 billion. This amount will be able to handle about 10% of the deals offered for sale in the next decade. Private equity fundraising cannot keep up with the demand. The lack of funding will make buyers very selective, and only the A++ deals will get done—and even those will have reduced purchase price multiples.
Coping with the Age Wave
If you are a business owner and you are hoping to sell or transfer your business within the next several years, how do you prepare your company to be competitive in what can be a very aggressive situation? Here are practical suggestions:
- Form a realistic view of your business. The value a buyer puts on your business is not based on what you put into it, but what they can get out of it. You must know the value of your business in the current market. It is also necessary to understand what you must do to enhance that value.
- Create a plan designed to help you increase the value of your business. Look for potential buyers while you get the business in shape to sell. Understand this can be a two to three-year process.
- Create priorities for how to focus your efforts over the next two-three years. Instead of working “in” the business, work “on” the business. The process is like getting a house ready to sell: the lead time may be longer, but you are making the business “market-ready.”
- Consult with an expert. Selling a business is not the time to go it alone. Just like you hire an accountant or an attorney, an exit planning advisor should be part of your team to help you prepare for the small business tsunami just on the horizon.
With some planning and careful thought, you can avoid becoming a victim of this perfect storm.
Topics: exit planning