The article in Wealth Management summed the dilemma up accurately:
There are some 12 million baby boomers who own a business, and 70 percent of them will be retiring over the next couple decades. Estimates of the total wealth locked up in these companies run in the trillions of dollars.
Written from the viewpoint of a wealth manager, this is a literal goldmine. However, viewed through the prism of a business owner, this is a huge and sticky quagmire. One of the major issues we are now focusing on in our M&A seminars is the pending impact of the baby boomer business owner retirement “tsunami.” This term was first used by researchers with the Pew Research Center to describe the impact of the waves of baby boomers retiring throughout the next 15 years or so.
Although the overall impact on society will be huge, the reality is baby boomer business owners, as they retire and presumably seek buyers for their companies, could overwhelm the market. Bill Entwistle, a Rhode Island-based financial planner, reportedly told journalist Mark Miller:
It’s also possible that as all boomer business owners head toward the exits at the same time, they’ll flood the market with companies for sale during a weak economy and not be able to extract the value they anticipated … Now that the economy is starting to get better the value of the business may be rebounding, but they will all want to get out at the same time.
Many of our clients are facing this dilemma right now. Their businesses are performing better in 2015 than they have in years (in some cases as far back as 2007), and the notion of selling now is being paired off against the idea that the business may be worth even more in five years. As the SNL character Stuart Smalley used to say, “That’s just stinkin’ thinkin’!”
Why doesn’t that make sense? First, you have most (if not all) of your life savings tied up in a highly illiquid asset. That places you at tremendous risk from both an economic standpoint (how many businesses failed during the last recession?) and from a personal standpoint (disease, death, dismemberment, disembowelment, and divorce are just some of the big D’s you are facing). Here is how the article in Wealth Management summed up the issue:
A report last year by the U.S. Small Business Administration found that small business owners over age 50 were significantly less likely than their employees to have pension or retirement plans, including 401(k)s on their current jobs…
“An owner might be maxing out a 401k and IRA, but the rest of his cash goes into supporting his lifestyle and the company … So, the problem gets bigger—they just haven’t effectively diversified their wealth,” [said John Leonetti, CEO of Pinnacle Equity Solutions.]
That in a nutshell is the problem: You are not diversified, and every day that passes is another day of assumed risk. And the longer you delay, not only does the risk of one of the Big D’s occurring increase (not to mention the broader economic risk that you have no control over) but you also face the reality that more and more of your aging peers will be putting their companies on the market.
Think about it: 12 million baby boomers own businesses and will need to do something with their companies during the next 15 years. Let’s assume that 40% of them close the doors of the business or turn the keys over to the kids/employees. So that leaves us with about 7.2 million that will seek buyers of some sort. And we will divide 7.2 million by 15 years = 480K businesses per year will hit the market. If you are more conservative (and assume that baby boomers will work even longer) dividing 7.2 million by 20 years, you still have 360K businesses entering the market per year.
Last year, according to Dealogic, in the U.S. 10,597 closed M&A transactions were announced – and probably three times that amount were simply not announced at all. So that means roughly 32K companies changed hands. How does 32,000 compare to 480,000 or even 360,000? Well simple math tells us that 480K is roughly 15 times larger than 32K, and 360K is 11x larger.
Simply put, the glut of baby boomer businesses hitting the market will swamp and overwhelm the buying community. A 15x or 11x increase is far too large for the M&A market to handle. And I kept the math simple and linear. In reality, the number per year will most likely increase every year, especially in the latter years of this 15- to 20-year window as age and illness force more and more aging baby boomers to hit the market.
Hopefully you can now see the dangers of waiting too long. This is a HUGE and looming issue that Generational Equity is quite concerned about. Why? Because if the data is correct and very few business owners have enough liquid assets saved for retirement, AND they are counting on the proceeds of their business to fund them for years to come, AND millions seek to do so at relatively the same time, we could have a retirement disaster brewing in this country.
The rude awakening that many of you could face is this: Social security could be your primary source of income during your retirement years. That should be a sobering thought (as if I haven’t sobered you up already).
Fortunately, as your luck would have it, we happened to be in the strongest seller's market in ages; a market that could provide you with ample income for years to come IF YOU ACT ON IT.
As they say with the lottery: You can’t win if you don’t play. The same is true about finding buyers or investors for your business: The current seller's market will end, most likely as more and more baby boomers enter it with their companies. That could be next year, the year after or so; it really doesn’t matter, for it will happen.
Because we are so alarmed about the pending baby boomer business owner retirement glut, we hold exit planning symposiums throughout North America, which are designed to do one thing: educate business owners about the possibilities of selling on their terms, not when one of the Big D’s forces them. You should attend if the information regarding a baby boomer retirement tsunami is news to you.
Carl Doerksen is the Director of Corporate Development at Generational Equity.
© 2015 Generational Equity, LLC. All Rights Reserved.
Generational Equity educated and informed us – so that we could be on the upside of a good decision (to sell).Bil MacLeslie, CEO, ipHouse
Thanks again Phil and feel free to have a future client call me if they would like a referral. You are a true professional!Andy Graham, Vice President, Modern Heating & Plumbing
Thank you again for all your guidance and support. Any company will achieve what they intend, if they have you on their team!Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
Your wisdom and experience were invaluable to me during this once-in-a-lifetime transaction.Ralph Noblin, President of Noblin & Associates
Generational Equity’s assistance was invaluable in compiling and marketing our business.Bil MacLeslie, CEO, ipHouse
The help you provided us during each step of this process made us feel very comfortable and confident we were selecting the right approach to transition our Company.Andy Graham, Vice President, Modern Heating & Plumbing
Tom Staszak is one of the most professional people I have dealt with in my last forty years of business. You’ve got a great group of people and you have built a truly professional organization.Michael J Polarek, President, Paragon Packaging
We were happy to see the interest in our company and what we cherished has not just a valuable company but an important company to the communities we served in.Larry Moore, Owner, A Company Portable Restrooms
I couldn’t have asked for a better team than Michael and Deborah. We couldn’t have done it without them.Robert Evans, President and CEO of Mealtracker Dietary Software
The process was much more involved than I expected and your help, experience and advice was a big factor in making the negotiations go as smoothly as possible.Terry D. Wickman, President, Keytroller
We thank you Eric and Generational Equity making our dream come true.Larry Moore, Owner, A Company Portable Restrooms
I wanted to write you a quick letter to express our appreciation and our delight on the outcome of helping us through the process of our recent sale. We are very happy with the end result, and are very happy to be able to move forward with all of our future growth plans.Terry D. Wickman, President, Keytroller
We will highly recommend Generational Equity and Musa Jagne to any business owner about to embark on the same process.Karen S. Williams, CFO, BW Manufacturing
Bruce and I wanted to take this opportunity to thank Generational Equity for assigning Musa Jagne to our transaction. In Bruce’s words, “Musa did one hell of a job for us!”Karen S. Williams, CFO, BW Manufacturing
Michael worked tirelessly, He followed every lead meticulously and urgently to make sure nothing was missed.Robert Evans, President and CEO of Mealtracker Dietary Software
We are very happy with the end result, and are very happy to be able to move forward with all of our future growth plans.Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
We are extremely pleased with the way Generational Equity handled the sale of our company. Your associates, Tom and Chris, did an outstanding job of getting us (me) through the process.Michael J Polarek, President, Paragon Packaging
I would like to thank you and your firm, Generational Equity, for being our valued advisors in our journey.Bil MacLeslie, CEO, ipHouse
Greetings Mike. Thank you for the captivating and compelling presentation you made at the Phoenix presentation last week. Over many years in business yours was the most informative and well-presented presentation, on any subject, that I have ever attended! Your energy and enthusiasm combined with your concise and captivating support of your positions with easily understood examples and data was compelling.Pete L.
I must say that I have never worked with a more driven, competent and focused individual as Don Ho.Jay Dinnison, Owner of Sharpe Mixers
I quickly recognized that Don was working for Sharpe Mixers above all else, and held our interests above others.Jay Dinnison, Owner of Sharpe Mixers
We knew it would be a difficult task to have someone really understand our business and our market, prior to researching a possible buyer, so it was imperative that we found someone of your caliber, with definite proven experience in this area.Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
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