Exit Planning Tools for Business Owners

Baby Boomers

Can Franchising Survive The Baby Boomers?

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As a consultant to business owners, this is a column I’ve hesitated to write for a long time. There are over 800,000 franchised businesses in the United States, and I’m not going out of my way to make that many owners mad at me. Since I often write and I speak nationally about the trends of Baby Boomer businesses, however, I frequently wonder whether the franchise business model can survive another generation in its current form.

A quick recap of franchising in the USA. “Business Model Franchising” (the sale of a turnkey concept) began in the 1940’s with KFC, A&W and Howard Johnson’s. In 1975 the first Boomers turned 30 years old, and the sale of new franchises grew from about 2,000 to over 20,000 annually in the next five years. Educated and competitive Boomers, squeezed out of Corporate America by their sheer numbers, embraced franchising with enthusiasm.

In turn, franchisors got highly motivated owners, who were willing to work very hard and make personal sacrifices for their piece of the American Dream. Predominantly in service industries, franchising benefitted from an exploding workforce of people who were focused on success.

The franchised restaurateur discovered that he or she could spend more time in the business by outsourcing other service tasks (like cutting the lawn or servicing the ice maker) to another franchisee. That franchisee could focus on building a bigger landscaping business by outsourcing his housekeeping to yet another franchisee.

The impact on our country was huge. Small business owners are productivity machines. They work long hours and weekends. This economic pyramid of highly productive small business owners spending their incomes with other highly productive small business owners has been the underpinning of American economic success for the last 35 years.

Failed franchiseNow it is coming to an end. The oldest Baby Boomers are turning 68 this year. By 2018 they will be reaching retirement age at a rate of 8,000 a day. From then until 2023, the next generation’s birthrate is half that of the Boomers, and they have considerably less enthusiasm for 65-hour or 6-day work weeks.

In addition, Boomers will consume less. The retired restaurateur starts doing his own gardening. The former landscaper does his own housework. The velocity of money (how many times it changes hands) will also slow as Boomers belatedly save for retirement.

This affects franchises particularly, because they are built on a model that assumes an owner is driving the business. If there aren’t enough owners, the model has to change. Depending on the franchise, it will happen in one of several ways.

  • Franchisors who have the foresight to develop strong manager training programs, along with the financial strength to purchase units from retiring operators, will convert to largely company-owned chains. For them, franchising will have been a developmental model, to be replaced as the first generation of franchisee partners makes its exit.
  • Successful multi-unit operators will grow as they take advantage of acquisition opportunities. Add-on units already have common systems, and family ownership succession is easier in a company with well-defined management structures. As these operators grow to nine-figure revenues and thousands of employees, they will no longer meet any normal definition of a “small” business.
  • Franchisors who remain dependent on a model that requires substantial start-up equity, long hours and hands-on management by an owner must change dramatically or fail. The franchisee they built their business model around is going away.
  • Franchisees with one or two units that they work in personally, and who don’t have children, employees or a franchisor willing to purchase the business, will close. There are simply too few small business buyers with too many alternatives.

All in all, the stereotype of a franchise as a local, mom-and-pop owned business will disappear. You can’t dispute the numbers. There aren’t enough operators  in the pipeline who fit the model of a shirtsleeve owner. Whether run by big multi-unit operators or the parent corporation, franchises will be very different ten years from now.

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Boomer Business Owners’ Retirement Accelerates

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Pepperdine University, in cooperation with the International Business Brokers Association and the M&A Source, publishes a quarterly Market Pulse Survey on the sale of small businesses in the United States. The most recent report, covering the fourth quarter of 2012, shows that “retiring Baby Boomers” is for the first time the number one reason for selling a small business in the United States.

I’ve written since 2007  in this space and elsewhere about the impact of Boomer business owners leaving their companies. You can download my e-book on the subject at www.theboomerbust.com. (The password for my faithful readers is “Woodstock.”) The Market Pulse Survey is just the latest indicator of a crest that is building, and which will have a huge impact on the American business landscape.

hedge mazeIf you are as acutely aware of the impact of Boomers on the American economy as I am, you begin to see it in a lot of places. I attended a luncheon with an official of the Federal Reserve a few weeks ago, and a question was raised about the recovery of residential housing. He pointed out that the introduction of 30-year mortgages with only 20% down transformed the US into a country of homeowners.

Home ownership grew to over 60% of households by 1960, fueled by larger families (Boomer children) and the GI Bill. It stabilized at around 65% from the 1970s through the late 1990s, when it began climbing again, largely as a result of political pressure to let the Federal Government (through their proxies, Fannie Mae and Freddie Mac) make mortgages available to a wider portion of the population. By 2007, the percentage of homeowners had reached almost 70%.

Residential housing markets began cratering in 2007, largely because too many people had been financed into homes they couldn’t really afford. They weren’t just the poor, but also included millions of Boomers who “traded up” in their quest for material success. (See the e-book for more on that Boomer drive.) The presenter pointed out that the population of homeowners was now stabilizing at much closer to 65%, which is assumed to be the normal equilibrium.

What if that is only a “Boomer equilibrium?” After all, the growth in home ownership occurred in a 50-year long expanding economy fueled by Boomers, first as household size increased, then as they became consumers. Aren’t we working with an assumption that the following generations will repeat the Boomer quest for more? Will GenX and the Millennials really get in line to splurge on ageing McMansions, or will they be satisfied with a more reasonable standard of functional shelter?

If the housing market suffered so badly in adjusting from a temporary high of 70% back to a more “normal” level of 65%, what will it look like if the next normal is 60%, or even 55%? (Prior to WWII only about 40% of US households owned their homes.)

The Market Pulse Survey also found that it is increasingly a buyer’s market for small businesses. That trend will inevitably accelerate, especially as we reach the 2018-2023 period, when Boomers turning 65 years old out number the GenXers turning 45 by 4,000 a day. If you are a young business owner, or plan to be one, the time is coming when you can pick and choose your opportunities.

But I’d be cautious of businesses focused on high-end residences.

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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.)