You’ve built your business – now you’re thinking about the transition. Is your future and place in history secured? Baby Boomers are the most entrepreneurial generation in American history with more than 10% of the boomer population owning their own companies. This represents more than 4 million business owners employing nearly 50% of our country’s workers. The first “BoomerPreneurs” started turning 65 in 2011, and these individuals are starting the process of retiring or transitioning their businesses at a rate of 1,000 per day.
By 2020, the youngest BoomerPreneurs will turn 55 and this transition rate will likely increase. But will they be able to find buyers among a younger generation who may or may not be interested in “standard” or “old-line” businesses?
Statistical trends, unfortunately, point to the likelihood that only 20% of the boomers will end up selling their companies or have a true M&A event.
There are many reasons for this, and we have covered a few together in past articles. But I think two of the most powerful lessons we can learn from this dilemma facing many BoomerPreneurs can be found in a pair of economic principles that graduate school economics professor at Babson College drilled into my head:
- The law of supply and demand (we all know this one)
- The axiom that all costs drive toward zero in a capitalistic society (Competition works!)
Ok, so what’s new about that? That’s economic theory; what does it mean for me? My top customer is ringing the other line!
Well…if you are like some and have invested wisely and been fortunate in your planning and fiscal management – or maybe you’ve just been lucky — you don’t have to worry about selling your business to help fund your retirement or cement your family’s legacy.
However, for those that do have to transition, exit or sell their companies to partially fund their retirement or maintain their existing lifestyle after they retire, the scenario is not as pretty, and the two principles listed above will have a direct impact on your ability to sell your business in the future. More on those in a moment.
Many are wrestling with the issue of their company being simultaneously the largest item on their personal balance sheet, while at the same time, the most illiquid of investments. See my earlier article about how 30% of companies in the lower middle market go straight to liquidation due to lack of a succession plan and only 2 in 10 achieve a true M&A event.
Many businesses are worth less than they were at the peak (2007), and many owners have put off the sale of their firms with hopes of recapturing that lost value. Meanwhile, BoomerPreneurs have also swallowed the 2012 U.S. Presidential election results and the recent capital gains news, and are now increasingly deciding – or recommitting – to selling or transitioning their businesses out of fear.
However, it’s not all doom and gloom! According to author, middle market expert and fellow member of the Alliance of Mergers & Acquisitions Advisors, Rob Slee, the window of opportunity to sell based on previous investment and capital cycles is rapidly closing and the time is now. 2013 – 2018 is the next prime selling cycle.
Here’s where that first economic principle comes in. With a glut of BoomerPreneurs retiring, pent up demand to sell, and the law of supply and demand in action, the ability to get the price you want will be very difficult if you’re ill-prepared.
As we know, private equity has culled many of the top performers already from the market. As a matter of fact, private equity owns or has controlling interest in approximately 38,000 Middle Market companies (12%), which represent 30%-40% of today’s entire market equity in middle market firms.
So under the axiom of all costs drive toward zero (there’s that second principle), unless your business is a stand-out performer, with many businesses coming on the market, prices will drive toward zero (or practically speaking will sell for lower multiples).
What then must the Boomerpreneur do under this kind of macroeconomic pressure?
The answers to the question above are many, and we will explore them together in coming articles. However, I submit to you that the industry – and indeed the entire country – needs another solution to business–as-usual as we leave the great recession behind. The sad fact is most companies fail to produce value beyond the cost of capital unless their owners diligently pursue a different way of doing things.
M&A 2.0 literally looks at the notion of value creation as the first step in selling your company. This begins with a mindset shift for the BoomerPreneur to work on his or her business, rather than work in his or her business.
The tools, techniques, process and systems in an M&A 2.0 approach likely are not that different from those you used to build your busIness, but they are the 2.0 version and we believe they are far superior!
Any conversation about creating value simply must begin with where you are now. You can take a brief 13-minute survey to find out the Sellability Score of your buisness or where the value lies in your existing business, and a full report will be generated that will help you assess where you are and which areas you should consider preparing to begin the process of building additional value in your company.
*M&A 2.0 is trademark pending