Exit Planning Tools for Business Owners

selling a business

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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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.