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Baby Boomer Business Owners Head For The Exit

David Henderson
 


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If the supply of interested and qualified buyers of private businesses does not increase, the expansion of the number of businesses for sale is likely to depress the values for private businesses. Just as the maturation of the baby boomer generation will place unprecedented strain on areas like social security and health funding, so the boomer business transition bulge will seriously strain, and possibly overwhelm, the available supply of buyers.

That bulge is just starting to make itself felt as the first of the millions of baby boomer owner/managers now start into their 60s and begin looking at transitioning out of their business. In the next few years this bulge is expected to become a tidal wave.

In short, the forecast is that there will be a glut of businesses for sale and, following the law of supply and demand, downward price pressure for most privately owned companies as the increasing number of businesses in play chase a declining number of potential buyers. The price of businesses could fall precipitously as more and more business owners try to sell into this buyer's market.

The coming glut in the SME business for sale market:

  • Australia reported in 2004 that 40% of SME owners were planning to leave within the next five years.
  • In the United States between 34% and 55% (depending upon the study) of privately held companies will change hands between 2006 and 2016.
  • Canada reported in 1999 that over three quarters of family business owners expected to retire within 15 years
  • In Ireland 67% of small business owners will be retiring in the next 10 years.

Bleak future for the unprepared owner

Just what this means in terms of numbers has been estimated (for the US) in an NFO survey in 2002. Among the affluent established business owners category for example (48% of the estimated total 9.5 million owners are considered affluent), the number planning to retire was expected to show a sevenfold increase from 50,000 per year in 2001 to 350,000 in 2005 (2) and to rise as high as 750,000 by 2009.

While the initial years of the wave (2004-2009) may see an increase in buyers as younger baby boomers and later generations seek to transition out of corporate jobs and buy their independence, starting in 2010 as the overall population of baby boomers ages, they will move to overwhelming ‘sell’ mode.

If the supply of interested and qualified buyers of private businesses does not increase, the expansion of the number of businesses for sale is likely to depress the values for private businesses.

The glut may well be exacerbated by an increase in the number of businesses that would normally transition within the family being forced to go to open market sale. Fully a third of family enterprises expect to pass on the business within the family but this strategy may not be feasible for a number of reasons. Apart from lack of expertise, funding or not meeting other requirements to run the family business, surveys are suggesting that fewer young people want to take on family businesses.

When a family sale or internal sale fails the seller must seek a buyer in the open market where they are likely to discover that it is worth far less than they had hoped for. All of the warts and moles of a company are only too apparent to a professional buyer applying a due diligence check.

Decreasing pool of skilled people

As birth rates decline and people live longer and retire earlier, the pressures of an aging population are shared by many countries worldwide. There are implications for business owners here also.

With an aging population a huge chunk of the baby boomer workforce will be planning to retire soon and businesses stand to lose a significant proportion of their trained personnel.

The skill set of a business’ employees constitutes a major factor in determining business value. Many companies make the mistake of only planning the financial transactional side of transition, missing the people part of the puzzle. But business value is leveraged off skilled people and smooth running operations - just the factors that may be disappearing rapidly in the near future.

Wider economic impact of failed transition

With respect to the successful transfer of businesses, the economy as whole is a major stakeholder. Given the current demographics of business owners, a high failure rate to sell - leading to business closure - will exert great impact on employment, economic output, and business formation in the future, particularly in rural areas where the loss of viable firms may reduce available employment or availability of services.

Successful business succession for retiring owners has become a major public policy issue especially in Europe, North America and Australia where programs have been set up to assist owners to sell their businesses to either their employees or, in the case of vital community assets in rural towns, to local community groups. The leveraged ESOP structure is popular as a structure to implement a gradual buyout of a retiring business owner by the employees. This process could maximize benefits to both the owner and the employees through deferring a 100% sale for a staged employee share ownership plan buyout (or buyin) process.

Time is running out for boomers

The vast majority of owner/managers have not developed an effective plan for transitioning out - many are reluctant to even acknowledge the need. Or the fact that less than half of business owners carry adequate benefit funds and are relying on the sale of their business to support their retirement.

This is a recipe for disaster in the era of the baby boomer transition. Anyone who is serious about exiting needs to be well prepared in order to compete for the most desirable acquirers, or to preserve the family business for future generations. For those business owners who intend to sell to a third party, it will become exceedingly important that they position their business to transition successfully in an increasingly competitive market.

With an impending glut of businesses developing on the market every owner must focus on developing a transition plan that increases the attractiveness, value, and saleability of their business.

Good reasons to begin transition planning now:

  • By 2009 the number of business owners wanting to sell up each year will have increased fivefold over 2004. This trend will continue for the next 10-15 years.
  • Transitioning your business during the first half of the boomer tidal wave (2005 - 2010) when the late boomers and succeeding generations start moving into ownership will provide the best chance of maximizing its value.
  • The economy is currently expanding and we are entering a strong economic cycle which creates a good environment in which to sell.
  • It takes approximately 2 years of focused activity to prepare a business for sale at a reasonable or maximum value.

ROCG is an international consulting firm of skilled business transition specialists with offices throughout North America, Europe and the Asia Pacific region. We are the only international firm specializing in the areas of strategy, finance and operations for privately owned and emerging growth enterprises.

To learn more about business transition and successful exit strategies, ask for ROCG's free booklet, “This Way Out - A Roadmap to Business Transition". Visit the website at http://www.rocg.com and look under ‘Publications’ to order your complimentary copy.

Subscribe to our monthly newsletter , Accelerator to receive our articles and information about ROCG workshops and seminars directly in your inbox.

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