The Business Exit Tsunami
Delay at Your Peril
In this article, the author, a business broker, shares his views on how the coming retirement of business owners will impact business owners themselves and what business owners should consider when meeting with a prospective business broker.
There probably is not much a small business owner (30 million in revenue or under) has not seen in the way of business cycles.Â If that business owner is a member of the baby boom generation (people born from 1946 to 1964), he or she has been part of a group that has made a significant impact on society.Â From infancy on, baby boomers have changed perceptions on everything from childrearing to retirement.Â In general, these changes have helped boost the economy of every decade since the end of WWII.Â And now, boomers, particularly small business owners, are about to have another impact, although this one may not be so positive.
These business owners may be thinking about taking it a little slower, travel more, deal with problems less.Â They may even be thinking about getting out of the rat race altogether.Â And why not? Â These individuals have built their businesses, provided for their families, and have made valuable contributions to the economy.Â However, if you have a client who is thinking of moving on to the next stage in their lives, youâ€”and theyâ€”need to consider the following:
- 70% of all businesses with more than one person on the payrollâ€”nearly 4.2 million companiesâ€”are owned by people who are age 53 or older
- Since 2011, 8,000 people turn 65 each day, and you have a pending business owner exit or transfer of epic proportions
- 7,700 + companies owned by private equity firms are also available for sale
- The private equity available to complete these transactions is roughly $535 billionâ€”this amount will be able to handle about 10% of the deals offered for sale in the next decade
This â€śage waveâ€ť is heading toward our economy like a tsunami gathering strength out on the ocean.Â And it will affect every small business owner for the next decade and a half.Â There are three major forces at work impacting business owners:
The Market Cycle
The economy goes in cycles. Â Currently, we are experiencing a robust bull market, which favors sellers.Â But, like all market cycles, this momentum will not last forever.Â At some point, the market will make a downward turn, and buyers will be finding favor.Â Markets in decline often mirror the demands in the ascendancy, meaning, the higher they go, the lower they fall.Â This market has been unprecedented over the past eight years.Â Eventually, after a crash, the market starts to rise, but there is no predictable time frame for a turnaround.
The Number of Businesses for Sale
Baby boomer business owners are not the only potential sellers.Â 7,700 + companies owned by private equity firms are also available for sale.Â Additionally, business owners who are ten years younger than the youngest baby boomers will be seeking capital for growth initiatives are also on the market.Â These facts add up to a host of competition for retiring business owners.Â It will serve to drive the prices of business down.
Lack of Capital
There is not enough funding to satisfy all the sellers looking to transition.Â If every business owner in the baby boomer demographic were to sell their business, the amount of capital required to close all those transactions is over $10 trillion.Â Currently, the private equity available to complete these transactions is roughly $535 billion.Â This amount will be able to handle about 10% of the deals offered for sale in the next decade.Â Private equity fundraising cannot keep up with the demand.Â The lack of funding will make buyers very selective, and only the A++ deals will get doneâ€”and even those will have reduced purchase price multiples.
Coping with the Age Wave
Most business owners fail to realize they have to plan for the sale of their business.Â According to recent statistics, only 20â€“33% of business complete the sales process.Â A study conducted by ROCG, a company that specializes in business transitions, showed 84% of the respondents to their survey indicated that the proceeds from their transactions were essential to their future.
However, according to the same study, 58% of all business owners do not have a formal plan. Â Among the reasons given for this lack of planning were:
- Too early to plan
- Too time consuming
- Too complex
- No adequate advice
- Do not want to deal with family/employee issues
- Too intimidating
Business owners need to be aware that there are steps they can and should take to get their businesses in shape to sell.Â As a professional, it is important that you remind your clients that a successful business transition does not have to be painful.Â However, it is important that business owners do the following:
- Form a realistic view of their business. As you undoubtedly realize, the value a buyer puts on a business is not what the owner has put into it, but what the seller hopes to get out of it.Â It is essential that the business owner know the value of the business in the current market.Â The business owner must also understand the steps he or she must take to enhance that value.
- Create a plan designed to help increase the value of the business. Business owners need to look for potential buyers while getting the business in shape to sell.Â They also need to understand that this can be a two to three-year process.
- Create priorities for how to focus their efforts over the next two-three years. Instead of working â€śinâ€ť the business, work â€śonâ€ť the business.Â The process is like getting a house ready to sell; the lead time may be longer, but the owner is making the business â€śmarket ready.â€ť
Probably the best thing a business owner can do to be sure he or she chooses the right options is to consult with an expert.Â It is important that selling a business is not the time to go it alone.Â As an exit planning professional, you should be part of the team that helps prepare your clients for the small business tsunami that is just on the horizon.
This article, in its entirety, is available in The Value Examiner, January/February 2018 issue.
Paul Visokey, MBA, president and founder of Stony Hill Advisors, is an expert in building and leading sales and marketing organizations in startup environments. Prior to founding Stony Hill Business Brokers, Mr. Visokey was in the commercial mortgage market leading marketing, business development, training, and information technology departments. His relevant experience has been gained while working for ROLM, an IBM Company, Octel Communications, Nuance Communications, and InterBay Funding LLC. He is the author of numerous articles and has the detailed knowledge required to assist business owners with their exit planning strategies.
Mr. Visokey can be contacted at (267) 535-2551 or by e-mail to firstname.lastname@example.org.