Today’s planners sit on the leading edge of what is expected to be the greatest transfer of wealth in the history of America. The economic boom of the 1990s created an unprecedented amount of personal wealth in America—currently estimated at more than $33 trillion. At the same time, today’s retirees constitute one of the wealthiest segments of the U.S. population with more personal wealth than any previous generation.
Economists believe that bequests of this wealth will significantly boost the resources of the 76 million Baby Boomers. That means by the year 2052, an estimated $40.6 trillion will change hands as Baby Boomers and their parents pass on their accumulated assets to their heirs. (“Baby Boomer Wealth Transfer“)
No, this wasn’t written in 2011. It was written in 2004. The idea began to catch on. In 2006, a book called The $10 Trillion Opportunity, was published, which focused on the need for private company transfers.
By the latter part of 2007, when the bottom fell out of many parts of the economy, there was substantial pent-up need for transactions within the private business community. I wrote about this emerging bubble of needed transfers on my blog at the time (Mercer on Value lived from 2005-2007 and is no longer around). Many other financial planners, business advisers and consultants of many stripes did so as well.
Transactional market participants have been sitting on the sidelines. Public companies slowed their collective acquisition pace when the markets took the wind out of their sales (pun intended). Private equity was paralyzed with a lack of financing and a lack of willing sellers. Traditional estate planning nearly died.
If there was a pent-up need for transactions in 2004-2007 and a need to transfer or liquefy massive wealth held in private companies, that need is substantially greater in early 2011. Why? Because little happened in the intervening years of financial crisis.
We know that transaction volume, i.e., the sale of private companies, has been low since the peak of acquisition activity during 2007. M&A activity increased in 2010, but remains far below 2007 levels. But many companies have cash and a need to employ it in acquisitions.
Private equity funds collectively have some $500 billion of powder for future transactions and are feeling increasing pressure to commit their funds.
To my way of thinking, public company and private company participants have been sitting on the sidelines for so long that they really want to do deals. The demand on the buy-side is increasing.
With the transactional markets improving and likely to continue to improve this year, what do Baby Boomer business owners need to do? Let’s talk about five ideas today.
- Sell the Business. Clearly, some business owners need to sell their businesses. For those who are willing and interested, it looks like the market for acquisitions by both public companies and private equity funds will be improving during 2011. My friend, Tom Deans, wrote a book, Every Family’s Business. I suggest that you read it if you are an owner or adviser. He will give you “permission” to sell your business. And he has no interest in helping you sell it. Nevertheless, my suggestion is to get a good sell-side adviser and get moving if interested and if the business is reasonably ready for sale.
- Prepare the Business for Sale. If the owner is ready and business is not, now is the time to begin getting it ready for sale. Two articles addressing this topic can be found here and here. The opportunity costs of not being ready are simply too high not to be working on readiness.
- Install an ESOP. Installing an Employee Stock Ownership Plan is an example of what, for many businesses, can be a staged transfer of ownership over a period of years. We started this process at Mercer Capital. In early 2006, my former partner and I sold half of Mercer Capital to our Employee Stock Ownership Plan (ESOP). He has since retired, and I’m enjoying work too much to think about that. We have transitioned management to the next generation.
- Leveraged Recapitalizations. Sometimes a company can engage in a leveraged recap, the effect of which is to transfer wealth to selected owners who sell stock back to the company. Ownership is then maintained in a family or close group of shareholders. Financing is becoming more readily available for such transactions.
- Special Dividends. A surprising number of private companies accumulate excess assets. Now would be a good time to consider a special dividend to reduce excess assets. The dividend tax rate remains favorable during 2011.
Too often, business owners think that the only thing they can do in terms of transferring wealth is to sell the entire business. In the short list above, we see three kinds of internal transactions that can accomplish all or some of the same objectives as selling out.
There is pent-up transactional need out there. The Baby Boomers who were 56 in 2007 will be 60 this year. Those who were 58 then will be 62, but then, you get the picture. Time marches on. It is time for the pent-up needs to become pent-up demand.
If you are a business owner, now would be a good time to schedule a meeting with your trusted advisers to talk about the transitions that are inevitably coming in your life. It is time to stop sitting on the edge of the pool of wealth transfer and to jump in – with a plan, of course.
If you are an adviser to business owners, now would be a good time to schedule meetings with your Baby Boomer clients to bring up the issues involved with intergenerational wealth transfers one more time.