Baby Boomer Business Bust - Victim or Victor?

If you are considering selling a $1,000,000 to $20,000,000 business within the next ten years, you will face unprecedented challenges. The United States is on the leading edge of a massive buyers-market for manufacturing, distribution and business services companies. If you saw the movie, it’s like the “Perfect Storm.” To understand and navigate what’s coming, read on.

A Bit of Background

In 1998 we began counseling companies about the impact the 78,000,000 Baby Boomer demographic bulge would have on small to medium sized business sales and valuations as Boomer business owners began to retire in about 10-12 years. In other words - right about now. You can hear an excerpt from one of our live presentations on this topic at Audio Briefs.

Think back to the euphoric attitudes that were prevalent in the late 1990’s and you’ll appreciate that for many business owners 2008 - 2010 seemed too far in the future to matter. Back then, business was great. A rising tide lifted all ships. Monstrous prices paid for early e-commerce businesses frequently lead “regular” business owners to hold unrealistically high valuation and sale expectations. Exit planning seemed unnecessary given a future that looked phenomenal.

Shortly thereafter, we experienced the meltdown of the early 2000’s. Thousands of businesses were thrown into bankruptcy and liquidation. Many owners lived in a state of shock, struggling to react to the dramatically changed economic realities of the new millennium. Exit planning was a topic for “later,” as many entrepreneurs focused on making it through the next payroll. As those owners watched valuations fall and debts increase, “getting out” successfully in the short term was improbable.

However, in recent years, lots of companies that survived the 2001-2004 bloodbath have done pretty well. They’ve posted solid revenues and profits. Balance sheets look much better and future prospects for most well established businesses have improved. The general mood we observe is one of cautious optimism.

One thing hasn’t changed since 1998, however. The Baby Boomer generation still owns and operates the vast majority of small to medium sized businesses. As expected, many Boomers are now beginning to seriously consider (or reconsider) retirement. Some who are not ready to retire are “burnt out” on their current business and are considering selling in order to do something else. Business publications are filled with articles about exit planning.
 
The Storm:

There are about 78,000,000 Baby Boomers in America - men and women that were born between 1946 and 1964. The leading edge of this demographic bulge is now in its 60’s. About 8,000 Americans turn 60 each day and about 3,200,000 will turn 62 in 2008. The first Boomer applied for Social Security in October of this last 2007. According to the US Bureau of Labor Statistics, about 43% of US workers will be eligible to retire within the next decade.

The 2007 Aging US Workforce Survey released by Ernst and Young in October 2007 noted that 68% of Fortune 1,000 companies consider “maintaining intellectual capital” to be their greatest organizational challenge. 62% said that retirements will create a “brain drain” within their companies.

There is no second boom on the heels of the Baby Boom. The young adults that comprise the so-called Generation X, were born during a period when the U.S. birthrate decreased to half the level of its postwar peak. In other words, we have about 45,000,000 Generation X folks coming along to replace 78,000,000 Boomers, and they will not necessarily have a lot of money to buy businesses. Their inheritance may be small and far away, as numerous studies indicate that (i) Boomers will live longer than their parents; (ii) they’ll seek to maintain a comfortable lifestyle that will deplete much of their savings; and (iii) only 48% (according to a 2000 Federal Reserve Bank and Boston University study) believe it is important to leave an estate to heirs – assuming there is even an estate left to bequeath.

Out of about 22,600,000 small businesses in America, about 5,700,000 have at least one employee. The Federal Reserve estimates almost 500,000 of these will change hands (or attempt to change hands) in 2008. That’s almost 10% of the total - a record number! Kiplinger Business Resource Center estimates that by 2009, 750,000 Boomer business owners will be looking for buyers.

There are about 304,000,000 people in American and 78,000,000 Baby Boomers. Therefore, about 26% of the American population is thinking about “getting out” or changing what they are doing. Over the next few years that phenomenon will produce a business buyers market, a shortage of key employees and unprecedented business turbulence.

• Business Buyer’s Market. Because of the demographic disparities noted above, over the coming decade, we’ll see a business buyer’s market caused by too many sellers chasing too few buyers. In a buyer’s market, overall valuations drop, because buyers have lots too choose from and become very discriminating. Only the best businesses will command interest and top pricing.

• Skilled Employee Seller’s Market. When there are too few qualified employees to fill the available positions, wages will rise and key jobs will go unfilled or will have to be filled by trainees. This will adversely impact productivity, profitability and growth prospects - thus business value and marketability.

• Business Turbulence. All the impending changes will make business planning extremely challenging. Some customers and vendors will vanish. Most companies will experience significant employee turnover. Longstanding relationships will be severed or jeopardized. New business practices will emerge. Entire markets will go away or be redefined. New competitors, both foreign and domestic, will emerge. Business buyers will view the situation as risky. More perceived risk by buyers and investors means lower valuations, slower deals, rigorous due diligence and fewer deals overall.
  

Add to these three issues the challenges of a global marketplace, formidable international competition, conflict in the Middle East, energy concerns, a reeling real estate market and a staggering national debt and we believe that small and medium sized business owners are facing the “Perfect Storm.”
 
Strategic Steps

This storm does not have to capsize your business boat. In fact, it can create great opportunities for the well-prepared. There is time to prepare – but not a lot. Even in difficult environments, excellent businesses not only can be sold, they can sell for a premium, since they shine like bright stars. Here’s how yours can be one of them.

• Get a Plan. Develop a sound exit strategy and start executing. Contact us for a free copy of our “Begin with the End in Mind – Exit Planning Guide.”

• Get a Market Valuation. Have a capable mergers and acquisitions specialist evaluate the likely range of value and the marketability of your business. Private Equities can do this, or you can hire another qualified valuator, but make sure someone who is actually out selling companies in the market does the work. Theory is nice and numerical games are impressive, but that’s not what you need. You need to know whether your business is sellable, how much it might really bring and what the potential pitfalls are. You need to know how to design it and prepare it for maximum salability in a buyer’s market. Contact us to request a free copy of “What’s Your Company Worth?”

• Talk to a Financial Planner. Meet with a good financial planner to evaluate your overall financial situation and develop a balanced financial plan that is not primarily based on selling your business for a home run price.

• Get Out or Get In. If you are just marking time in your business and have done all you want to do with it, consider taking it to market soon. Certainly within the next 1 - 2 years while we are still on the leading edge of the Boomer retirement wave. If you want to stay in your business (or you have to stay in your business based on your financial situation), then you’ll need to really need to make sure your head is in the game and focus for a few years. You’ll have to innovate and implement new strategies in light of the market forces we all face. You’ll have to make some key strategic investments back into the business.
  

Preparing mentally for the storm ahead is critical.

Lest you think I’m stating the unnecessary, I rarely encounter a sixty year old business owner who is working with the same intensity, creativity and commitment as he or she did in the early days; nor are they investing back into their business like they used to. We like our free time. We like our vacations. We like our toys. There’s a lot of stuff we don’t want to do. There are a lot of things we think we shouldn’t have to do anymore.

Even in the current context of economic uncertainty, many Boomer owners are in a zone that feels comfortable. But the market will do what it will do regardless of whether we feel comfortable – regardless of how we think things ought to be. Unfortunately, the market has a storm in store for us. If your business boat is just bobbing along, it’s likely to get swamped.

CrossPointe has developed three key strategies to help middle market businesses thrive and retain enterprise value and marketability over the next decade. If you’d like a summary, Contact us and request  “StormProof."