There is a significant sea change coming in the business ownership landscape. Simply put: The baby boomer age bracket was a generation of entrepreneurs. More businesses were founded and grown by this group born from 1946-1964 than ever before. In fact, according to a recent Axial article (Axial is a leading network that combines business owners with sources of capital), “66% of all businesses with employees, nearly 4 million companies, are owned by baby boomers.”
That is a significant number of businesses in the U.S. The vital question is what will these baby boomer business owners do with their companies as they hit retirement age? In generations past, typically the oldest child or other siblings would inherit the business upon the retirement of the founder. But demographics have changed, according to Benjamin Gerut of Kuzari Group, LLC, who is speaking from a private equity viewpoint on the situation:
“What is more important for many private equity firms is what the baby boomers did not leave behind. Baby boomers generally had far fewer children than their parents, and the unavoidable outcome is succession and liquidity challenges later in life. It is the solution to both succession and liquidity that these owners are seeking.”
Indeed, what private equity firms are now realizing is that during the next 10-15 years assets will come available that in the past would not have. These assets represent thousands of well run, profitable companies located throughout North America. Here are some additional statistics to ponder regarding this critical trend:
Ten TRILLION dollars worth of businesses will change hands by 2025, according to several experts. Think about that number for a moment!
An estimated 65% to 75% of small companies in the U.S. – some 10 million – will likely hang up a “for sale” sign during the next 5-10 years, according to Inc. magazine.
Research from the Pew Research Center indicates that the oldest of America’s baby boomer generation started turning 65 on January 1, 2011, at a rate of 10,000 people a day — a trend that will last for the next 19 years.
Clearly our economy will be experiencing a shift never seen before during the next decade-plus. The good news for business owners who are at this stage of their life and will be retiring during this time frame is that equity firms are gearing up to help you monetize your asset. This is how Benjamin Gerut puts it:
“With inheritance out of the question for many of these entrepreneurs, the need for an alternative, meaningful exit is becoming evident. The trend is a very promising one for many private equity groups, and even more, for the baby boomers. As the baby boomers look to retire, many private equity firms will be vying for those assets.”
This process is already beginning. Based on our conversations with equity firms, we are finding more and more that are staffing up and changing their focus in order to meet the needs of retiring baby boomer business owners. To a greater extent than ever, our clients are telling us that they are preparing to retire in 5-10 years but they want the legacy that they have developed in their businesses to continue.
In order to accomplish this, they are looking for equity investors who can provide capital to grow the business, something most business owners are simply unable to generate from ongoing operations. In many cases, planning far enough ahead (and engaging an M&A advisory firm to help) will allow a business owner to find a partner who will provide much needed liquidity, deeper pockets, and managerial skill in order to help the company grow.
This is generally called a partial sale and is a true win-win for both the seller and the buyer. The seller retains a portion of the equity of the company and participates in a second “bite of the apple” a few years later when the much larger company is taken public or sold. The private equity firm gains access to a valuable asset, and ownership is retained allowing them to ensure smooth continuity of the business.
Be Proactive
The key to this arrangement is planning. Don’t wait until you are 65 to begin exploring your options. We recommend that you begin the process at least five years before you plan on retiring and that you include your wealth manager in these discussions so you can determine how much you will need to live on post-retirement. Here is the typical timeline that we work with for our clients who are looking for growth capital with an eventual exit (a.k.a. partial sale):
Phase One – Evaluation and valuation of the business: 2-3 months
Phase Two – Document creation and buyer list development: 3-4 months
Phase Three – Active marketing of the asset: 3-6 months
Phase Four – Negotiations and close: 3-4 months
Phase Five – Post sale successful integration: 8-12 months
Phase Six – Post-sale operation of new entity: 1-3 years
Phase Seven – Second liquidity event for original ownership: 3-5 years
So as you can see, if a partial sale is what you seek, it is critical that you start this process several years before you plan on retiring. That is why a partial sale does not work for every business owner. If you are already burned out, over the age of 70, or facing health or family issues, then staying on board for 3-5 years post-sale is not realistic. We can still help you in that scenario as well; we would simply look for a buyer willing to acquire your company outright so you can retire. There are loads of strategic buyers willing to do that.
However, as you can imagine, having two liquidity events as outlined above can be far more financially lucrative. So again, plan ahead. If you are in your 50s or early 60s and have no exit plan in place, attend a Generational Equity M&A seminar (and you should consider attending as well if you are in your 40s). We cover this topic in greater detail and walk you through a variety of deal structures, including the concept of a partial sale.
Again, I can’t stress strongly enough about the need to plan ahead for your succession. All too often business owners delay these decisions until it is too late. The vast majority of your net worth is tied up in your business. Many of you want to leave behind a financial legacy for your family. The only way to ensure this is to get ahead of the age curve and face the reality of your mortality (i.e., too many entrepreneurs are under the impression they will live forever).
Again, according to Gerut:
“There will definitely be a bell curve of retirements, but while difficult to predict, the peak will likely occur over the course of the next 10 to 15 year.
For more on this topic and assistance in planning call me at 321-287-0349 or visit https://yourfloridabusinessbroker.com