Exit Planning Tools for Business Owners

business strategy

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 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.)

Another Lost Generation?

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I had the opportunity to present “Beating the Boomer Bust” twice this week, one of which was recorded for a Texas Public Radio show this weekend. For those who aren’t familiar with the piece, it discusses the massive changes that are unfolding as Boomers retire from their businesses.

As usual, members of the audience said afterwards “I knew all those things, but I never thought through the implications before.”

A quick recap before I get into today’s topic. “Beating the Boomer Bust” is a look at the perfect storm facing retiring owners who plan to sell their businesses. That largest small-business-owning group in history will be selling all at the same time. The number of buyers is about half as large as the number of sellers, and the buyer generation (Gen X) isn’t interested in the type of work that small business entails.

It is that group, the buying generation, that could be facing a demographic squeeze that changes them into a new “lost” generation.

The first Lost Generation is the group born in the decades just before the beginning of the 20th century. The oldest members of that group were in their teens and 20’s during WWI, which decimated the ranks of the young men, although less so in the USA than in Europe. Those who returned were traumatized, and more worried about enjoying life than making their mark on the world.

Enter the Roaring 20’s. The Lost Generation writers, Gertrude Stein, Ernest Hemingway, F. Scott Fitzgerald and T.S Eliot among others, promoted both hedonistic lifestyles and a cynical outlook towards humanity. The 20’s generally bring to mind Flappers, Speakeasies, Gangsters, and a spectacular finish with the Great Depression of 1929.

Many generations have been characterized as wastrels when they are young. The Lost Generation had the added misfortune to reach their productive years, their 30’s and 40’s, just as the economy made it very, very difficult to get ahead. Now, let’s skip forward to Generation X.

What Boomer hasn’t complained about the work ethic of Gen X? Gen X was born and raised in a time of plenty. They have grown up in an economy that was fueled by a giant generation of workaholics, the Baby Boomers. Their values system places a far lower premium on business and financial accomplishment. Self-actualization comes first, accumulating things is secondary.

Disclaimer: Please don’t send comments about “I’m a Boomer and not a workaholic” or “I’m an X’er and work very hard.” No generational generalizations are universally applicable. I get it.

Now they have the added misfortune of being in their 30’s and 40’s when the economy isn’t very receptive to building wealth or rapidly expanding a business.

At first blush, I didn’t think that was a problem. With one X’er for every two retiring Boomers, there should be more than enough opportunity for even the marginally interested to succeed. The more I think about it, the more I begin to wonder whether that will be the case. Two other factors are coming into play, and both are huge.

The Boomers aren’t getting out of the way, and the Millennials are coming on fast.

Boomers haven’t saved enough to retire in comfort. They can’t depend on the government to make it up for them. They are healthier than any previous generation. If 60 is the new 40, why would they (outside of the public sector) suddenly step down at 65? They want to be busy, and they want to be wealthy. Many, if not most, are planning to spend at least a few additional years in that pursuit.

The Millennials (depending on who you ask, roughly the generation born between 1985 and 2005) are coming of age in a difficult environment. Jobs are scarce, finances are lean, and the position of America in the world is changing. All indications are that the Millennials will push harder than the X’ers to get what they want.

Where the X’ers are widely characterized by their sense of entitlement, the Millennials clearly expect their lifestyles to be a direct outcome of their success in work.

So this is what leads me to ask about a Lost Generation.

The Big Picture: 78 million Boomers, still working hard, and delaying their exit from the business arena. 38 million Gen X’ers, with high expectations and lower motivation. 80 million Millennials coming on fast and intent on competing for what they want.

The Small Picture: X’er in his late 40’s who has spent the last 20 years in business telling the employer how he wants his job to fit his lifestyle. He is waiting for a late 60ish Boomer in front of him to get out of the way. When it finally happens, he suddenly finds that there is a Millennial in his late 20’s who earns less and works more waiting to leapfrog him.

If you are a Boomer business owner who can’t find the next generation of leadership among your X’ers (and there are millions of you), start looking at your Millennials while you still have some time to train them.

 

Painting: Han Wu Shen “Young Worker” at paintinghere )

Lifestyle or Legacy – Part 4

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Last week a client told me “You are wrong. I have a lifestyle business that is ALSO a legacy business.” Sorry, but that doesn’t fly.

He has built a good company, and continues to improve it. Be he is not driving to make it into something that carries on beyond him. His objective is to (eventually) make it large enough to be acquired, and for enough money to live in luxury for the rest of his life.

That is a lifestyle business. It’s only purpose is to fund the financial aspirations of the owner. There is no larger purpose, no overarching vision of something beyond his quality of life. I’ll grant that his personal ambition extends beyond his current, very comfortable existence. But it only extends to a more comfortable existence. That is a matter of degree, not direction.

When I started to think about this series, the term “lifestyle” was easy. The second term was originally “entrepreneurship.” That didn’t communicate the concept well enough. Thinking through the topic, it reduced the definition of “lifestyle” to more of just making a good living, and of “entrepreneurship” to building something larger than merely a decent living.

What I am talking about encompasses ANY lifestyle you choose. Whether it is a nice house in the ‘burbs, or sailing around the world in a yacht, that is still lifestyle. We all have different targets.

Legacy is when it moves beyond you, when the company becomes a vehicle for accomplishing something larger than your personal quality of life. By that definition there are probably legacy businesses that don’t provide a luxurious lifestyle, but they satisfy the owner’s desired level of creature comforts and support that bigger vision. Perhaps something that allows an owner to go on missions to Africa for half of each year might qualify. For the most part, however, owners have to reach a pretty comfortable lifestyle before legacy comes into the picture.

Most legacy businesses were lifestyle businesses first. The owners scratched and pushed (or were incredibly lucky) to build a level of security and sustainability. Once they got here, however, they looked around and said “This isn’t enough. Mere wealth doesn’t fill the need I have inside of me.”

Another owner said to me ” I want a legacy business. I want to go visit my outlying offices and not fix problems. I’d fly in, give awards to the top performers, and take a major client out for golf.”

That is also a lifestyle business. The legacy owner wouldn’t be coming in to fix problems either. He or she might be looking for an acquisition in that market, or communicating new goals. He might be upgrading personnel; not because they were failing, but because he was constantly looking to do better. The numbers are still important, but they aren’t going towards improving his lifestyle, they are being used to build the legacy.

Before you start worrying about the lifestyle vs. legacy decision, let me make something plain. Some 80% of small businesses fail in their first few years. Of those that survive, probably 90% never achieve the lifestyle level of success. There are very, very few owners who reach a point where they can work as little as they want and make as much as they want.

Some do, and a few of those think “OK. Is that it?” Some of those can’t envision anything else. Some start building a legacy.

To quote Nancy Barcus: “The closer one gets to the top, the more one finds that there is no “top.”