Wednesday, February 8, 2012

Baby Boomers again think about selling their businesses - 2012-14 could be your time

We have been writing about the Baby Boomer Business Transition Bubble since 2001. The demographic impact of the baby boomers reaching retirement age has been suppressed in the last few years since the economy has depressed business results and many business owners have been forced to return to basics to help maintain their business' health. Correspondingly, the numbers of business sales have been minimal since 2008.

Baby boomers, however, are not getting any younger.

Over the next several years, the U.S. economy will experience an unprecedented volume of wealth transfers. The result will be a glut of businesses for sale and downward price pressure for most privately owned companies. 
There is a little publicized and understood transfer that will take place over the next 15 years with the inter-generational wealth transfer from baby-boomers to the children of baby boomers.  The entrepreneurial explosion in the U.S. over the last 35 years has resulted in record numbers of well established small- to mid-size private businesses with annual revenues ranging from about $1 million to $75 million. For most of the private businesses started in the 1980s and early 1990s, the owner or owners are now 55 years old and over. Just as the baby boomer demographic bulge threatens the solvency of the Social Security system as boomers approach retirement, the private business owner demographic bulge will seriously strain and possibly overwhelm the available supply of buyers and the support infrastructure for business transition and transactions as these owners approach retirement. We have called this the baby boomer business transition bubble.

How big is the bubble?  
How big is this demographic segment of owners of established privately held businesses? The best estimates indicate that there are approximately 8.1 million established businesses in the U.S. Factoring in companies with multiple owners, approximately 10.2 million owners. These businesses tend to have from 2 to 500 or more full-time employees beyond the owner; have been in business for at least three years; and have a work location outside of the owner's home. These established businesses are in virtually every sector of the U.S. economy.  

The outlook going into the downturn in 2008
From both quantitative surveys and through our frequent discussions with small and mid-size business owners, we saw the early stages of a transition tidal wave developing. A quantitative study by research firm NFO, updated as recently as 2008, showed that among the affluent established business owners (48% of the owners are considered affluent); the numbers of business owners planning to retire were projected to more than double from 350,000 in 2006 to 750,000 by 2009 and to reach over 1,000,000 by 2012. This was up from only 50,000 in 2001.

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.  

What are business owners going to do?                                               
Most business owners are still focused on their businesses and waiting for an economic turn. They are determined not to miss another upcycle. Based on several recent economic forecasts, there will be an up-tick in the economy for 2012 -13, followed by another dip in 2014, then another uptick in 2015. The concerns about inflation, the national debt, and the world economy have most forecasters pessimistic about the latter half of the decade. Based on these forecasts, we may be the entering the best "upcycle" for the next decade. One business owner suggested: "If it's not likely to get much better over the next few years, I may not get any more if I hold the business for another 5 years. I may be better off selling as soon as possible."  
Timing is always tricky. We believe that demographics will drive the ultimately drive the market. We are advising our clients to prepare their businesses to sell in the 2012-14 window if they plan to sell at all over the next 10 years. Conditions for sale are improving: bank lending for acquisitions is begging to improve, there is an enormous supply of capital to invest in companies, and company results are improving.

What should business owners do to prepare?
Rushing your company to market is never a good idea. In order to build a maximum value at exit, business owners need to focus on improving profitability, building a management team, and growing revenue. Since most the selling price of most businesses will be based on multiples of EBITDA for the previous 12 months, getting a business ready takes time. In addition, such issues as the strengthening accounting and reporting, cleaning up corporate and capital structure. Most investment bankers and M&A professionals estimate that it takes a minimum of two years of focused effort to get a business sold (from preparation through sale).

The takeaway for business owners - sell on your terms.
Most advisors are suggesting that business owners start preparing now to be ready as the transition market peaks.
Consider the following:
1.       The first of the baby boomers turned 65 years of age in 2010; the last of the baby boomers turned 45 in 2010.
2.       The numbers of business owners wanting to sell businesses is at an all-time high and continuing to rise dramatically
3.       The economy has stabilized; even has up-ticked in some sectors; many forecasters believe 2012-14 may be the best years of the decade
4.       It will take 1 to 2 years of focused activity to get your business ready to sell at a reasonable price

Additional information: If you would like an independent assessment of the readiness of your business to sell for maximum value, please contact us. We help guide companies through the value creation process and assist them in preparing the company prior to going to market. 
ACG Denver has two upcoming programs that may be of interest.
·        Rocky Mountain Corporate Growth Conference held on March 13 -14, 2012
·        "Selling a Business in Today's Environment" - a 4-part series which will run in April-May, 2012 

About The Mead Consulting Group

Helping to create Colorado success stories

The Mead Consulting Group, Inc. has been providing strategic planning & execution, execution coaching,  strategic marketing, business development and leadership development services to mid-size businesses since 1981. We specialize in working directly with owners and CEOs to help their companies reach the next level of success.  Our clients have achieved superior results and consistently out-performed their peers. 

In 2012 many clients are exploring new markets, examining new business models, and gaining new market share while enhancing profitability. 

It's All About Results!

We've stood in your shoes,
worn your hats and
walked your talk

Like no one else, we can help you successfully navigate through

§   Strategic Growth and Execution

§   Increasing Profitability and Cash Flow

§   Maximizing Value for Exit

But, don't just take our word for it. Ask our clients.

For more information, see our website 
or  contact Dave Mead at (303) 660-8135 or 


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