Friday, November 16, 2012

Why demographics may drive business owners to sell - Re-evaluating your transition and exit


[Editor's comment: Many business owners and CEOs have been pointing to the presidential election for some signs of positive change in the business and economic environment. It has occurred to me that perhaps these hopes may have been unfounded - regardless of the election outcome.  - DPM]

Have the markets for transitioning your business fundamentally changed? In the early 2000's there was a robust market for selling businesses.  The economy was strong, the market was flush with private equity, and the opportunities to grow businesses seemed endless. Then came the great recession of 2008 - 201_.  Has this recession been a blip? Will we be soon returning to robust economic times over the next few years? Many were very hopeful during the recent presidential election cycle. Regardless of your political leaning, there may be forces at work that neither candidate could overcome.

Demographics have a profound impact on business cycles. Twenty years ago, I attended a conference with the keynote address given by noted demographer, Harry Dent, who forecast several major economic cycles over the past several decades including the early 1980's and the current recession starting in late 2007. Dent's basic premise is that business cycles and opportunities are driven by demographic-based economics. Since 70% of the economy depends on consumer spending, he reasons, tracking consumer spending volume is a key driver. Spending habits, life decisions, etc. are driven by significant demographic changes. If you follow the bulge of baby boomers through the lifecycle, the last of the baby boomers reached age 47 in 2012 - a time in life that starts a decline in overall family spending.

See the graph below which shows peak U.S. family spending. While it shows a slight spike, coincidentally in the 2016 election year, Dent shows that the next decade will decline, bottoming in 2023.

Spending Wave Chart

Demographic spending patterns may indicate 10 more years of decline. Whether or not you believe Harry Dent's many other conclusions, it is interesting to note that in recent years economists have become focused on economic trends caused by demographic extremes. Declining birth rates and aging populations in Europe and Japan foretell long-term economic decline. Issues with a dramatic imbalance of males and females in China due to the 1-child rule (mostly male) are causing predictions of a serious aging population within the next 20-30 years, etc.  The truth is, politics and policy aside, that the next decade could continue to be one of decline in the U.S. until the spending impact of the echo baby boomer generation (2023 -2050) takes effect.

Baby Boomer Business Transition Bubble. If you are a business owner demographics also play another role. If you are a regular reader of the Dave Mead blog and this article series, you have read about the  Baby Boomer Business Transition Bubble. The number of baby-boomers who own businesses who are at (or approaching) retirement age who need to sell to provide liquidity for retirement is at an all-time high. Consider this - in 2001 the number of business owners with businesses between 5 and 500 employees that needed to sell was 50,000. That number reached 350,000 by 2006 and 750,000 by 2008-10. There were relatively few sales in 2008-2012. Today, with that four year pent up supply of sellers, the number is estimated to be between 1.2 to 1.5 million.

What does all that mean to you, as a business owner? If you have many work years ahead of you, your business is performing well, is in an industry with strong growth independent of the economy (e.g., healthcare), and revenue and profits have been growing despite the downturn, you might continue to focus on strategies that will help you continue to grow and expand. Investment bankers, however, report that companies in this situation are commanding valuation multiples at near-record levels and are in high demand. So you could take some chips of the table.

If there is limited growth in your industry, if your industry and company is dependent on robust overall economic growth, perhaps now is the time to prepare to exit. In these situations, the value of your business may not be higher in 5-10 years - it may actually deteriorate. If a business owner is in his/her fifties or sixties and the business has stabilized with good EBITDA over the past 12 months, consider preparing to exit as soon as your company can be prepared. As we have outlined in other articles, it may take 12 -30 months to prepare and execute a successful sales transaction. Properly prepared companies have historically sold faster and at higher valuations.

Knowing when to harvest your business may be your most important decision. If you would like to have a no-obligation conversation about building value in your business and evaluating the optimal path and timetable for a successful transition and/ or exit, please contact us at Mead Consulting. Our senior consultants have been involved with helping dozens of business owners maximize value as well as having the experience of previously navigating their own businesses through successful exits. 

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