More than a decade ago, Richard Jackim and Peter Christman wrote a book called The $10 Trillion Opportunity. In the book, the authors forecasted massive future sales of private businesses because of the aging of baby boomer business owners. They were right in that there were millions of aging business owners. However, they were early in their prediction of a tsunami of private company sales by those baby boomer owners.
The Age of Aquarius?
The population of baby boomer business owners continues to age. I don’t have to cite a statistic for this. All I have to do is calculate the average age of business owners I meet and look at myself. Baby boomers are reaching the magic age of 65 at the rate of ten thousand per day, and that will continue for more than 15 years. Many business owners are perhaps waiting for that elusive perfect time.
The absolute perfect time to sell a business is when the stock market is hot, when the economy is good, when industry conditions are favorable, when financing is readily available and cheap, when conditions at a company are on the upswing or perking along with good margins and growth, when management is ready and has plans for what follows and …. It reminds me of a song by the 5th Dimension, Age of Aquarius, which states, in part:
When the moon is in the Seventh House
And Jupiter aligns with Mars
Then peace will guide the planets
And love will steer the stars
This is the dawning of the Age of Aquarius
Age of Aquarius
I’m not sure if the Age of Aquarius, or the perfect time to sell a business, will ever come. I wrote about this in February 2011.
A Perspective on the Baby Boomers
To touch on the baby boomers once again, many baby boomer business owners missed the surge in mergers & acquisitions activity that preceded the crash in 2008. There was pent-up demand for selling businesses in 2008. Now that we are in 2017, that pent-up demand is causing unknown pressures for business owners, their families, and their employees, who are uncertain about the necessary transitions that await. One M&A adviser told the story this way in 2014:
What happened between 2008-2011?
The answer, from a business transition viewpoint, is very little. Businesses generally suffered a decline in revenue, profitability and cash flow, making them less valuable to buyers. It became very difficult to finance the purchase of a business as credit became tight and de-leveraging began to occur. Transactions were difficult to close. Sellers sought a return to the prices that were paid in 2005-7 which was not realistic given the reductions in value. Companies that performed well during the downturn achieved greater multiples of value as there was a shortage of supply of quality sellers.
Baby boomer transition bubble just got kicked down the road?
In essence, the bubble is still there – it just got kicked down the road. Now, the backlog of sellers is bigger and the situation may become more urgent. It is true that most business owners have adjusted their retirement expectations and it has been estimated that retirement ages have been pushed out about 3 years on average. Since very few businesses sold during the 2008-2011 timeframe, there is an enormous backlog of business owners who would sell given the right circumstances. Our best estimates are that between 1.2 million and 1.5 million business owners are in that backlog.
The situation has not changed much since 2014 from a broad perspective.
Pent-up Demand for Sales by Business Owners
Pent-up demand for business transactions is a fact of life. We know from history that transactions tend to come in waves. When will the long-awaited wave of transactions involving baby boomer business owners arrive? I don’t know, but it almost has to come soon. In terms of age, the leading edge of the baby boomers turns 71 this year. The lagging edge turns 53. There are 76-77 million boomers.
Many of the baby boomer businesses are small firms with limited potential in the M&A markets. However, much of successful, private corporate America is owned by and led by boomers. We won’t live forever.
I spoke recently with a business owner. He is 75 years old and still working. His business needs to transition to the next generation of owners (not his family). And yet he waits. The longer he waits, the less ability he will have to negotiate a favorable transition. The situation is even more dire if he becomes disabled or dies and his family is left to handle the transition. This is, perhaps, an extreme situation, but it is not uncommon.
Owners should, as always, be running their businesses as if they were in the market to sell. I have said many times that a business that is ready for sale is, well, ready for sale. It is also a whole lot more fun to work in than one that is not!
So business owners should be preparing themselves and their businesses for the next transaction wave. Business advisers should be encouraging their clients to get ready, as well. I’ve written about being READY for Sale before. Is your business ready for sale? This is an important question for baby boomer business owners.
The tsunami is coming. We may not see the Age of Aquarius, but we will see more deals in the future. Will you be ready? Will your clients be ready?
What is Your Business Worth?
One of the things business owners can do is retain a competent business appraisal firm with transaction experience to provide a range of values for your business. Try Mercer Capital, my firm. We provide a growing number of value estimates each year. Why are business owners requesting this service? Many owners know that a sale is in their futures. They want to become informed about the potential range of pricing that they might see if they engage in a sale process. I recommend that business owners obtain valuation calculations that provide a range of values based on an assumed transaction with financial buyers. At the same time, the appraisal firm can provide a range of values based on assumed transactions with strategic buyers.
In an engagement like outlined above, the appraiser will provide a value or a range of values at both the financial control and strategic control levels. In a coming post, we will talk about what adjustments are appropriate to reach values at each of these levels. However, note that potential buyers know what adjustments they think are appropriate, and those adjustments might not be in your favor.
Everyone, of course wants to sell to a strategic buyer. However, they can be hard to find when you really want them. Most transactions occur at financial levels because many private companies are simply not big enough or unique enough to warrant the interest of larger, strategic buyers.
Regardless of the nature of buyers who you may come into contact with, it is best if you have a good idea of what your business is worth and why. And it is good to have someone you can call to talk to who will have your interests at heart when you first receive that “unexpected” call.
The wave is coming. Is your business READY for sale? As I noted above, this is an important question for every business owner. Do you have the answer? If not, now is the time to get focused.
Valuation is important for business owners for many reasons. One of these reasons is for the operation of buy-sell agreements. If you are thinking about your buy-sell agreement (and you should be), then take a look at Buy-Sell Agreements for Baby Boomer Business Owners, my Kindle book on the topic.
I’ve priced it at $2.99 so you won’t have to think about the expense. So click on the image of the book. You will be taken to Amazon. Then buy the book. Don’t be mislead by the price. It is a full length book. If you like it, as most readers have, please take a few minutes and review the book on Amazon!