Even though I see the numbers often, the findings still surprise me.
- 72% of small business owners do not have an exit plan and are not taking action to create one. (2016 Securian Financial Group)
- 54% of small business owners want to exit their business within 10 years. (2016 Securian Financial Group)
- Since 2013, for the first time and every year thereafter, the primary motivation for business sales is the retirement of Boomer business owners. (2013 Pepperdine University, Market Pulse Survey)
Boomer business owners are grappling with retirement uncertainties such as: Will I have enough money to retire particularly considering my long post-retirement life expectancy? Can I maintain my lifestyle? What about health care?
Boomer business owners fantasize that “I’ll find a young buyer just like me who will pay me all the money I need to retire”. Unfortunately, there are many fewer buyers for Boomer businesses than there are sellers. The seller’s world over the next ten years looks like this: a flood of businesses coming to market, many of which will not find buyers.
5 Options for Boomer business owners:
- Ignore the problem. Every business owner eventually leaves his or her business – voluntarily or involuntarily. Let’s just see what happens.
- Wait and watch. You know what is coming, but your competition doesn’t. Keep track of financial indicators, follow closely the trends in your industry and in the broader Mergers & Acquisitions market.
- Execute an orderly liquidation. In order for a business to be saleable, it must have transferable value. If the business can’t run without you, it will be very difficult to sell. If realistically you can’t sell your business, focus on accumulating savings and develop a nest egg outside the business. This can take at least a year to plan.
- Prepare for a sale. The good news is that high-performing companies are in high demand. This type of investment is attractive because it offers a much higher rate of return than can be found in the stock market. Such a company must be ready to go to market. It should have a minimum of a three year history of steadily increasing revenue and profits, financial metrics (such as gross and net margins, return on assets and return on equity) in the top quartile of its industry, a solid management team, and processes in place that will allow a new owner to continue to generate superior returns. Such a company will attract buyers willing to pay high multiples. Buyers today would prefer to pay seven times earnings for top quality companies rather than four times earnings for mediocre companies. But make sure you sell before the next recession and give yourself time because the sale can take at least 18-24 months after the planning is completed to put the business on the market.
- Hire your buyer. The best opportunity for many companies is a sale to a key employee. If that person is not currently in your organization, go out and find her, groom her for leadership, and then prepare a plan to sell to that key employee. That plan should include a transition of management responsibilities, an initial sale of a minority interest – typically 10%-20% – followed by a sale of the remaining interest, preferably using outside financing. In order to obtain outside financing, your key employee/buyer must show a proven capacity to manage the business as well as have an equity stake. Management transitions can take a minimum of 2-3 years or longer if you have not yet hired your successor.
We are entering an environment in which planning is becoming increasingly important, but Boomer business owners are very slow to begin that planning. The longer you wait the more difficult it will be to plan a successful exit.