A time always comes when business owners ask themselves, “Should I begin thinking about selling my business?” Your success depends on your strategic exit plan, deal team selection and timing. And business owners today face four big threats now through 2029 that no other generation has had to face.
First, a demographic tsunami of baby boomer businesses is coming on the market from now till 2029. A bit of background will give you some insight into its impact. The U.S. Census Bureau defines baby boomers as those born between January 1946 and December 1964. There are approximately 78 million of them; around 10,000 are retiring every day. Assuming they retire at 65, they will retire at a rate of 4.1 million a year through 2029.
Small businesses (500 employees or less) number 28.2 million as of 2013. Baby boomers own about 43 percent of those businesses (12.1 million). About 60 percent of the 12.1 million businesses will be put up for sale through 2029 (7.26 million). That averages 403,333 businesses on the market each year. Businesses put up for sale between 2008 and 2013 averaged 123,000 per year. One can readily see the tsunami impact going forward — 403,333 vs. 123,000.
Second, it is a buyer’s market over the next 16 years. Transaction volume is steadily increasing (five quarters in a row since 2013), and transaction prices are increasing in recent years (2010 – 2013). However, sales price multiples indicate that it remains a buyer’s market. Though sellers are getting much higher prices than they did just a few years ago, buyers are getting better value for their business-buying dollar. This is shown by multiples that remain at historic lows. The average multiple of revenue for sold businesses in the first quarter of 2014 slipped 1.2 percent year-over-year to 0.59 percent, and the average multiple of cash flow fell 0.6 percent to 2.21 percent.
Third, 80 percent of the businesses put up for sale will not close. Two reasons explain this high number: (1) poor strategic exit planning and (2) overestimating the value of the business. Though 96% of baby boomers agree that planning an exit strategy is important, 88 percent do not have one. You would expect well-thought-out plans to get the most money out of the business would be in place before going to market since on average 70 percent of the business owner’s net worth is tied up in illiquidable assets. Unfortunately, this isn’t the case; most owners skip the strategic exit planning and preparation phase because they are too busy managing and expanding their businesses. They jump ahead into the sales process ignoring personal financial goals, management or family dynamics, market timing, value enhancements, wealth and tax planning.
Fourth, owners do not know where to turn. Owners’ trusted advisers have limited understanding of strategic exit planning. When owners do turn to them, these advisers aren’t prepared or equipped to properly counsel their clients. Consequently, they refer the client to the “known” specialized resource in this space, the investment banker. The banker plays an important role in an external exit, but many aren’t equipped or compensated to determine an owner’s long-term financial needs and exit channels, or to implement value enhancements, strategic tax plans and wealth preservation. They are hired to sell the business externally at the highest price they can achieve.
Lessons learned from these threats are (1) begin planning early; (2) prepare your company to go to market; (3) select an interdisciplinary team of experts who can work together; (4) monitor the team with a lead consultant; and (5) execute the plan when the timing is right. Exit planning and execution are a process, not an event.
Gary Miller is founder and CEO of GEM Strategy Management Inc., www.gemstrategymanagement.com, a management consulting firm advising middle market companies and their sponsors on strategic business planning, growth and expansion strategies, raising growth capital, preparing them for sale and taking them to market. He can be reached at 877-792-0972 and firstname.lastname@example.org.