Exit Planning Tools for Business Owners

John F. Dini

The Road Less Traveled

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Somewhere ages and ages hence:
Two roads diverged in a wood, and I,
I took the one less traveled by,
And that has made all the difference.

Perhaps Robert Frost’s famous poem isn’t a perfect expression of what I am trying to convey, but the idea he expressed has been ingrained in us (the Boomers- I think Maya Angelou has replaced Frost as required poetry reading in schools) enough to serve my point.

Some thousands of business owners have heard my presentation on the inevitable issues of selling Boomer businesses. Hopefully, even more will  hear it in the future. Many have read my column, caught me on the radio, or bought my book on selling a business. Even so, they represent a small fraction of the estimated 6,000,000 Baby Boomer entrepreneurs with employees in the US.

If you are reading this, you are better informed than 99% of your peers. Whether you are a Boomer preparing to exit, or a gen X or Millennial thinking about becoming a business owner, you know more than almost all of your competition.

I can’t do anything about the birthrates of 65 years ago, or of 45 years ago, or of 25 years ago. Neither can you. From 2018 onward we will have a dramatic, decade-long imbalance between 60 somethings and 40-somethings in the workforce. That has implications for the economy, politics and general business, but it will have a special impact on retiring small business owners.

The Boomers will retire. Some have done so already, some will wait for as long as possible, but sooner or later they will all leave their businesses. We’ve discussed how “the curve” of Boomers entering any given age bracket exploded markets in home building, college graduations, franchising, fitness and so much more.

We could expand the discussion to other industries, from motorcycles (Harley-Davidson has been caught without a product for middle-aged Xers) and cars (Ford recently said that they had sold as many retro Mustangs to 55 year olds as that market will absorb), to garden homes and second-career counseling.

America has grown, and 78 million Boomers in  country of 320 million obviously won’t have as much impact as when they were 40% of a country with 190 million people. But it is a generation exceptionally oriented towards being successful, and working very hard to own the material indicators of that success. Their passing will still create huge ripples.

If you’ve read this series, you are armed with knowledge; the realization of an inevitable glut of small business sellers, and the coming shortage of buyers. You understand why the generational traits of Boomer sellers have made many of their businesses undesirable to their prospective buyers. You should also have a pretty good idea of what needs to change in your business, and how to start down the road of making those changes.

But tomorrow your business will still require the same attention that it does today. You will be just as busy, and making long-term changes will be just as easy to postpone until you have “more time.” Investing time, energy and money in a Second-in-Command or a Successor-in-Training is easily left for another day.

A few business owners will choose the road less traveled. They will begin to shift their perspective from the immediate issues of competing in the day-to-day marketplace, and instead start to focus on competing for a successful end game.

Those are the owners who will beat the Boomer Bust.

 (This is the tenth and final installment in a series about “Beating the Boomer Bust.” Previous installments are The Approaching Tidal Wave, The Pig in the Python,  The Brass Ring, Work-Life Balance, Outsourcing America ,  The X Factor, The Gen X Business Buyer , Beating the Boomer Bust and Choosing a Buyer for Your Business.)

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Beating the Boomer Bust

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We’ve looked at the coming generation of business buyers, and many things about that picture aren’t pretty. When I present to business owners about the Boomer Bust, this is around the time that someone in the audience says “So, are we just screwed?”

No. There are things you can do to make your business more transferable, and more appealing to those buyers who will be looking for an opportunity.

First, remember that my generalizations about a generation are just that. Both words derive from the Latin root genus, which meant both “birth” and “type.” A historical comment: it’s interesting that one word meant both things, because it was an era when your birth determined your type, or your role in society for life.

Not every Boomer is a workaholic. I know plenty of slacker Boomers, although none that are successful business owners. I also know plenty of hard-charging X’ers. So the first thing to remember as  Boomer business owner is that Generation X buyers for your business aren’t nonexistent. They are just far fewer than the number of sellers because of their numbers, values and choices.

Second, every business problem is better tackled with planning and preparation. Positioning your business for a successful sale is like putting timers on your lights at home. Any experienced burglar will tell you that he can case a house for a few nights to determine whether there are timed lights, but why should he? There are far more houses that don’t have any precautions at all. Most privately held businesses aren’t planning for transition, and won’t be ready when the time comes.

A third reason not to be depressed is remembering who you are. If you recognize yourself in our profile of the hard-working, driven Boomer business owner we’ve presented here, then your competitive nature should kick in as you think about being one of the winners in the transition.

After all, selling your company is probably the most significant financial event of your lifetime. Why wouldn’t you approach it with all the energy and problem-solving ability that you possess?

Any successful transition of your business is a sale, whether it is to a third party, to employees or to family. We will use sale as a generic term synonymous with succession, transition. merger or acquisition just to keep things simpler. When I am speaking about a specific approach, I will differentiate between an internal sale (to employees or family) and an external sale (to a third party).

I’m also focusing on the transfer of a business from an individual, or a few partners, to another individual or partner group. Many small business owners approach me looking for a third party sale to a “strategic buyer.” All they know is that they’ve heard a strategic buyer pays far higher multiples than other buyers, so that’s the kind of buyer they want.

Very few companies selling for less than $10,000,000 are sold to strategic buyers. It is more frequent in technology and in some distribution channels than in other industries, but it isn’t common at all. If you are a typical small business providing services on a local basis, a franchisee, a retailer, or a professional firm; there is little likelihood that you offer the kind of strategic differentiation required to attract a large (and wealthy) corporation to your door.

Understanding your prospective buyer is a key part of the selling process, but it isn’t the only part. before we discuss how to position for the next generation(s) of buyers, we have to step aside to talk about where you begin.

The Starting Point

Preparing for a successful sale to a typical small business buyer begins with an honest assessment of where you are today. What is your company really worth?

Most business owners have a very subjective approach to valuing their business. They talk to colleagues at trade shows about rumored prices for sales in their industry. They ask other business owners in their local area about the sale prices of unrelated companies. They read stories in the news about publicly traded acquisitions. Then they pick the number they like the best. “After all,” they say, “my business is as good as anyone else’s.”

I see too many cases where owners become emotionally committed to that number, to the point where they are highly offended by any other. They tell their personal financial planner to use the number in their retirement planning. They put the number on their personal financial statements to the bank. After a while, that number becomes fact, whether it originally had any basis or not.

Your planner or your banker isn’t qualified to verify the value you place on your business. For many owners whose net worth is 50% or more dependent on their business asset, picking a number based on hearsay or second-hand information is tantamount to insanity. It is your biggest asset, don’t you want to know what it worth?

There are a number of valuation specialists who can appraise your company. Any qualified professional will look at comparative sales, the market, your industry and the current  cost of financing.For most small businesses, a reasonable appraisal can be purchased for a few thousand dollars. (A side note: “free” appraisals or those generated in one-day seminars are often worth what you paid for them.) Once you have it, you can use the logic and multiples to track your approximate value for at least several years.

The Target

Once you know what your business is worth, targeting becomes much simpler. You take your net worth today (without your business), determine what you will need at retirement, and the sale price of your company has to make up the difference. A Certified Financial Planner has the ability to help you project your retirement needs, as well as the software to calculate tax implications and inflation.

With the company’s real present value documented, and a target amount based on realities of the market, you can set a date for your exit.

Setting a date is much, much more than just a theoretical exercise. Every plan must start with a goal, and your goal has to be both time and amount sensitive. “I’ll keep working until my business is worth $5,000,000.” isn’t a plan. “I’ll quit when I am 65 years old, and just hope that I have enough to live on.” isn’t a plan.

Setting your exit date doesn’t mean you have to stop working. It doesn’t even mean you have to leave your business. It’s just the target for when you can leave your business. Once you are there, the actual timing is up to you.

If you have a plan, you can start positioning for the sale. That’s where understanding your buyers’ market begins.

(This is the eighth installment in a series about “Beating the Boomer Bust.” Previous installments are The Approaching Tidal Wave, The Pig in the Python,  The Brass Ring, Work-Life Balance, Outsourcing America ,  The X Factor and The Gen X Business Buyer.)

The Gen X Business Buyer

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Generation X’ers aren’t mini-Boomers. Raised in a rapidly growing economy by parents that approached child rearing as a competitive activity, they saw more, did more, and were given more than their parents could have dreamed of.

I took my first commercial airline ride when I was 25 years old (and before my mother’s first flight). My two sons had each boarded planes over 50 times before they were in high school.

I was not an athlete, and have no hardware to display testifying to any athletic prowess. My youngest son made varsity in one sport, for one year. Yet he has a bookcase full of trophies.

I received a couple of piano lessons from a neighbor who played. My children had paid instructors for martial arts, gymnastics, baseball, piano, viola, singing, and math. They are far from the most-coached kids I know.

The challenge of selling a business to a small and disinclined group of prospective buyers starts with their lack of numbers, but it is just as much about how they were raised by their Boomer parents. Generation X has different values and many more choices.

Values

The numbers are just the most obvious (and the most inevitable) factor impacting Generation X as buyers. The second factor is values. Every Boomer owner I know, and there are hundreds, has complained about the expectations and the lack of a decent work ethic among Generation X. This isn’t caused by a special laziness gene. It is a matter of values.

Boomer “super parents,” driven by their competitive  approach to everything, raised children who expected to be accepted for who they are, and to have things done for them. Boomers created the children’s ball team where everyone got a trophy just for participating, regardless of the team’s success. X’ers watched their parents struggle with a breakneck pace and the concept of work-life balance and, like every generation of offspring, saw their parents’ approach to life as stupid.

So Generation X, by and large, doesn’t equate material comfort directly with work. Their “balance” is oriented towards separating work and life. Unlike most Boomers, who live to work, the X generation only works to live. Work isn’t their identity, it is merely the thing that permits them to finance what they really want to be.

For Boomer entrepreneurs, who accept a 50 or 60 hour work week as simply part of the cost of business ownership, that isn’t good news. The next generation of buyers doesn’t agree with you, and isn’t interested in subordinating their lives to the quest for success.

Choices

I know five local CPA firms that have sold to regional or national competitors in the last 3 years or so. Each had the same problem. They had built a model where the retirement of the Boomer founders was dependent on the profits to be generated by the next generation of partners. Unfortunately, that generation wasn’t interested in assuming the required work load. In several of the cases, a younger partner was invited to a meeting, where the senior partners announced that he or she had been selected as the next leader of the firm. To their shock, the annointee turned them down flat.

Corporate America is aware of the coming shortage of educated, hard-working, middle-aged executives. They are recruiting them with far greater benefits and perquisites than a small business can afford.

Since the 1970’s, a flood of regulation and increasing liability connected to business ownership makes the entrepreneurial proposition riskier and more tedious. The Boomers have only themselves to thank for that.

The retirement of the Boomers is placing a crushing burden on Medicare, Social Security and pension funds. The likelihood of greater taxation, and lower benefits for those who follow, detracts from the attraction of working hard to make a lot more money.

Finally, technology has vastly expanded Gen X’s choices. Flex time, telecommuting, job sharing, family leave and home-based businesses make the traditional model of sitting in a business all day look far less appealing.

The bleakest future is for a small business that has few factors, other than the owner’s personal reputation, to differentiate it from its competitors. It depends on the ongoing efforts of its owner to produce revenue. It has a number of employees who are only trained on the job, or who possess few distinctive skills that make them an integrated part of the business. It has no incentives that lock the best performers into long term relationships.  It lacks middle management, or anyone who can run the business indefinitely without the owner around to make decisions.

If that describes the business you own, it is time to start making changes. The generation that is reaching business-buying age has more choices for earning a living, and many more choices that better fit their values.

This series is focused on Boomers who are preparing to exit their businesses. For owners who precede the Boomers (currently in their 70’s), there is still a market of younger Boomers (in their late 40s and early 50s) to sell to. We are describing a problem that is only going to accelerate in the next 5 years. It is unavoidable, and the numbers are irrefutable.

There is some good news. You can do something about it. Most small business owners will remain oblivious to the realities of the market until they try to sell, and even then probably won’t understand the reasons why they can’t.

Like the hiker running from the bear, you don’t have to be faster than the bear. You just need to be faster than the other hiker. Simply reading this puts you ahead of the pack. We next turn our attention to what it will take to successfully exit your business in the toughest selling market in history.

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(This is the seventh installment in a series about “Beating the Boomer Bust.” Previous installments are The Approaching Tidal Wave, The Pig in the Python,  The Brass Ring, Work-Life Balance, Outsourcing America and The X Factor.)

 

The X Factor

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There are two sides to every business transaction, a buyer and a seller. For most of the last 50 years in America, the Baby Boomers have been the biggest buyers in history. They bought homes and cars to spur the economy after World War II. They bought franchises to provide services for each other as busy parents. They bought SUVs and McMansions when they became the affluent middle-aged.

Squeezed out of a corporate America that didn’t have room for them, and couldn’t offer the clear path to success they had been raised to expect, the Boomers formed new businesses in numbers unmatched before or since.

In 1975, when the first Boomers turned 30 years old, there were 300,000 new business formations in the United States. By 1986 when those same Boomers were 41, we saw almost 750,000 new businesses open, a number 250% larger than just 10 years before.

Just as importantly, by 1990 the rate of new business openings had dropped back to 600,000. It has remained at roughly 600,000 ever since, despite that fact that the national population has grown by almost 65,000,000 people since then (from 249 million in 1990 to over 313 million in 2010).

Boomers didn’t just open a lot of businesses because of their sheer numbers, although that was part of it. They opened them because the had been raised with greater expectations than previous generations. Their values focused on material evidence of success, combined with a powerful attachment to a workplace persona. Subsequent generations have not embraced business ownership like the Boomers did.

But in 2010 the first Boomers began turning 65, and a generation that has driven the American economy by buying feverishly is about to turn into sellers. It won’t happen all at once. Improved health care, technology, their value on work roles and a fairly dismal record of saving will all combine to keep the Boomers in the workplace longer than their parents. But sell they will, and soon they will be bringing a massive wave of small businesses to market.

The buyers are Generation X, the youngest of whom were just turning 25 years old as the first Boomers hit 65. Generation X as a term has been used in various ways as early as 1964 to describe disaffected adolescents, to describe all 20-somethings, and to specifically cover those born between 1960 and 1965 (note that several of these uses are actually about Boomers). My preferred definition is the tenth generation since 1776 born as citizens of the United States (Roman Numeral X).

This generation, beginning with the babies of 1965 and continuing through 1984, is a big problem for Boomers who are preparing to sell their businesses. The issues are three-fold: numbers, values and choices.

We will first discuss the numbers, since they are the most powerful argument for what is to come. We cannot change the birthrates of 40, 50 or 60 years ago. All the people who were born between 1945 and 1964 are born. There will not be any less of them. Those born between 1965 and 1984 are the same, there won’t be any more.

This is a deep dive into the statistics. It may be a bit tedious for some folks, but it is critical to understanding the scope and impact of the problem.

Numbers

Even on the face of it, the numbers aren’t favorable for the Boomers who will be selling their companies. The X’ers number about 69 million in total, around 9 million, or 11%, fewer than the Boomers. That may not sound like a lot, but think about how profitable your business would be with 11% fewer sales.

Eleven percent of any market is a chunk. If your market is the entire United States of today, taking 11% off the table would mean removing Indiana, Massachusetts, Michigan, Wyoming and Virginia. Those aren’t minor markets. (Well, maybe Wyoming, but I needed to make the numbers come out.)

Most markets aren’t the entire country, however. Starting with the Boomers as children, Marketers have increasingly segmented and targeted age groups for their products. Shrinking a target market by 11% means fewer prospects to sell to, and small businesses for sale will simply have fewer prospective buyers.

The impact is even more dramatic when the curve of births is examined. Boomer births peaked in 1957 at 4.3 million. Gen X births declined steadily from 1965 through 1973, when only 3.1 million, babies, 28% fewer than in the peak Boomer year, were born. For the period from 1953 through 1957 almost 21 million Boomers were born. For 1973 through 1977 there were just under 16 million new X’ers.

That means from 2018 through 2022, when those babies hit 65 years old, almost 5 million fewer people (23%) will be turning 45, and entering their prime business buying years. What would your market look like with 23% fewer buyers? What happens to pricing and competition when you start with 3 buyers for every 4 sellers?

We are rapidly approaching the worst imbalance between small business sellers and buyers in history, and it will continue for the next 20 years.

If the problem was limited to the numbers alone it would still be dramatic. In addition, there are other factors that make the numerical shortfall even more pronounced. The profile of the buyers, the values and the choices of Generation X,  will exponentially increase the gap between Boomer sellers and the people to whom they expect to sell their businesses.

(This is the sixth installment in a series about “Beating the Boomer Bust.” Previous installments are The Approaching Tidal Wave, The Pig in the Python,  The Brass Ring, Work-Life Balance and Outsourcing America.)

Outsourcing America

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The Baby Boomers created seismic shifts in American culture and economics throughout their lives. Their mere numbers caused much of the shift, but their competitiveness and commonality enhanced the impact at every stage of their lives.

In the mid 1960’s, as we’ve seen, the Boomers delayed having children. Unlike every previous generation, they chose to work longer and accumulate, or at least spend more, wealth. The “trough” of birthrates was lowest between about 1968 and 1978. By the early 1980’s, the Boomers began their delayed child-bearing in earnest.

As the parents of Generation X, the Boomers didn’t suddenly abandon their defining characteristics. They became competitive parents. Parenting became a performing art. Peer pressure made competitive parenting into a status symbol. They set out on the quest for ultimate child development.

The Boomers had two ways possible to approach perfect parenting. The first way requires a huge commitment of time. Mom stays home, and Dad is home as much as humanly possible. You pour your time into giving attention to your children. You engage them in all household activities, such as gardening and cooking. You do their homework with them, and teach them how to play sports. You practice with them, and dedicate evenings and weekends to their development.

That road to perfect parenting doesn’t leave much space for dual career households seeking the upper reaches of the socio-economic ladder. You can’t work lots of overtime, bring work home, play golf with customers on weekends, or go out for career-enhancing social events if you are spending every spare minute delivering instruction and experience to your children.

As a smart, educated, and efficient parent the solution is obvious. You outsource all that stuff. Outsourcing traditional parenting chores served a dual purpose. It saved time for Boomer parents who were focused on career-building, and it created business opportunities for those who couldn’t, or wouldn’t, compete in  climbing the traditional career ladder of corporate America.

Business model franchising was first established in the 1940’s, beginning with businesses that offered prepared food to replace home-made meals. From 1975 (when the first Boomers turned 30) through 1986 the number of franchises sold in the US skyrocketed from about 2,000 to 22,000 annually. That number leveled off in 1986, and remains roughly constant through today.

Competitive Boomer parents had an answer to their time constraints; one that still suited the drive to give their children the best of everything. Little League became merely the first step in sports development. If you were serious about supporting your child’s sporting prowess, you paid for year-round leagues, traveling teams and private coaches. The same logic justified martial arts classes, music teachers and tutors for school subjects.

At home, busy parent could “buy” time by outsourcing not only cooking, but house cleaning, laundry, yard maintenance and repairs. “Do it yourself” faded as a point of pride, replaced by hiring an expert to do it better.

The explosion of franchising was fueled by the rising tide of Boomers serving Boomers. They provided both the service providers and the consumers who paid for those services. By the 1980’s, the portion of the US Gross Domestic Product from services had risen to over 70%.

For franchisors and their franchisees, the model fit Boomer ambitions beautifully. Once established, franchisors had a ready market of hard-working ownership prospects. Many, and probably most franchises are driven by the personal efforts of the franchisee. He or she often opens the business, closes it, and delivers or supervises the delivery of most of the services.

Franchisors are relieved of the expensive, time-consuming roles of motivating employees and managing the day-to-day operations. They don’t need to set sales goals or create growth incentives; Boomer owners do that all by themselves.

What happens when franchisors run out of middle-aged Boomers to buy and drive their growth? The youngest Boomers are now entering their 50s, and are no longer prime candidates for start-up ventures. The oldest Boomers are rapidly (at a rate of 1,000 every 8 minutes) moving out of their peak outsourcing consumption years.

On August 6, 2011, Standard and Poors Sovereign Credit Rating Unit downgraded America’s debt rating from AAA to AA+. The next day the head of the unit, David T. Beers, was asked in an interview to estimate when the top rating might be restored. He replied, “What Americans have to understand is that this country reached its demographic peak ten years ago.”

“Awake at 2 o’clock is a weekly column for business owners. This series has been examining the impact of the Baby Boom generation on cultural shifts and the economy of the United States, in order to build the base for the rest of the discussion to come.

What will happen to the millions of Boomer-owned businesses when it is time to hand them off to a generation that is smaller, has very different values, and has far more options? Our next column will begin examining those buyers- Generation X.

(This is the fifth installment in a series about “Beating the Boomer Bust.” Previous installments are The Approaching Tidal Wave, The Pig in the Python,  The Brass Ring and Work-Life Balance.)