Exit Planning Tools for Business Owners

business planning

Ready…Set…Exit! Part I

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For the last six years I’ve been writing and speaking around the country to business owners about the coming tsunami of retiring Baby Boomer business owners. My e-book “Beating the Boomer Bust” details the  statistics (For a free download, go here and enter the seminar attendee password “Woodstock”), but the numbers are inescapable.

According to www.bizbuysell.com the brokerage industry reports the sale of less than 8,000 small (under 500 employees) companies each year. There are between five million and six million such businesses in the USA that are owned by Boomers between 48 and 68 years old. That makes business owners about 7% of the Boomer generation (78,000,000).

By 2018, Boomers will be reaching their 65th birthday at a rate of 8,000 a day. That pencils out to over 550 business a day reaching  a logical point of sale. At current volumes, the brokerage industry can handle from January 1st almost through January 15th of every year. The other eleven and a half months you are on your own.

There are hurricanes, super storms, and perfect storms. The arrival on the ownership scene of GenX and the Millennials, who have less money and less enthusiasm for 60-hour work weeks, makes the wave of retiring owners a super storm. The need of big businesses to replace their retiring Boomers by offering higher salaries, better benefits and more flexibility make it into a perfect storm.

out the doorOf course, business brokers and the burgeoning industry of exit planning professionals (disclosure: I am certified in both) intend to cash in on the wave of sellers by vastly increasing their businesses. Even with a shortage of buyers, I’m sure they can double or triple their number of successful sales. Tripling would reduce the number of unsold businesses to only 485 per day. That’s 20 small companies with employees unsold hourly… 24/7/365. Do the math.

Of course, not all of the companies that change hands sell through business brokers. Some are passed on to families. Many are acquired privately, with accountants or attorneys facilitating the transactions. Others are sold to employees.

For small business owners, the third option, selling to employees, is too often the option of last resort. Owners ask their legal and financial advisors what to do. They prepare their company for sale (for a really solid new book on getting your company ready for a third-party sale check out The Exit Strategy Handbook by Jerry L. Mills). They list the business on the Internet or with a broker.

For any number of reasons, the business doesn’t sell. Perhaps they don’t have enough time because  the owner is burned out or ill. Their return on assets is too low, or their industry outlook is poor. The financial markets are tight, or there are just too many other businesses available for a limited number of buyers.

Finally, in desperation, they “sell” the business to employees for an installment note. In some ways these transactions often resemble the subprime mortgage market. The employees really aren’t qualified to grow the business. They need a job, and the terms can be stretched to any length to fit the cash flow available, so they are willing to sign whatever looks sustainable. If they don’t make the payments, the only recourse is for the owner to take back a company that he doesn’t want, and whose value has declined.

It’s a bad way to get rid of a company, but for many owners it is the only one they have left. It doesn’t have to be that way. We will talk about the alternatives next week.

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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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Small Business can Sell in a Recession

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This was an article I had published in the San Antonio Express News yesterday.

Guest Voices: Small businesses can sell in recession

Many business owners think that the current recession has ruined their exit strategy. While the climate may be more daunting for budding entrepreneurs, there are still plenty of buyers around for small businesses.

For Main Street businesses (those selling for less than $3 million), buyers chiefly are driven by personal economics. They are seeking a business as a way to make a living. Their main objective is cash flow, the amount of discretionary income the business generates to cover bank debt and an owner’s salary.

In a recession, the most common economic buyer is an executive who has lost his or her corporate job. These buyers usually have good management skills and substantial savings, along with enough net worth to make a lender comfortable.

Be aware, however, that former corporate executives are also very cautious shoppers. The concept of going it alone can be terrifying enough in the best of times. As a buyer gets closer and closer to closing, the idea of working without a safety net looms larger.

In a giant organization, missing your budget means a poor performance review. In a small business, it could mean closing the doors. Executive buyers need extra assurance that they will succeed. If you are an entrepreneur who has risked it all for years, their concerns may generate little sympathy, but they are a fact you have to deal with.

Harsh economic times also bring out the bottom feeders. These are buyers who shop incessantly for companies that can be bought at bargain basement prices. They frequently will use the economy as an excuse to make a low-ball offer, claiming that your business will not be able to sustain its historical profitability going forward.

Unless you’re actually seeing a decline in revenues and profits, there is no reason to entertain an unfairly low offer for your company. Most small businesses have a minuscule market share and can thrive in any economy if they are careful and aggressive. Unless you are focused in an industry that is especially hard hit by the current downturn, there is no reason to think that general economic conditions will have a proportionate effect on your company.

Of course, your expectations of what constitutes a reasonable price are critical. When buyers are already nervous about financing and the future, an inflated price can scare them away quickly and permanently.

Many business owners price their companies beyond achievable expectations based upon multiples for public companies, industry rumors, their own financial needs or simple misunderstanding of the profitability measurements used in mergers and acquisitions.
There are several national databases that show actual sale prices of small businesses in relation to the profits and size of the company. Though the opinions of your accountant or attorney may be helpful, they may vary widely from the actual pricing that is being achieved in the marketplace.

Just because times are challenging, that is no reason to put your life plan on hold. Like every other aspect of owning a business, the sale of the company will be much more successful if you start with good information, plan carefully and have realistic expectations about the outcome.

John F. Dini is president of MPN Inc. He also operates the nation’s largest franchise of The Alternative Board. He can be contacted at jdini@mpninc.com.