More than 60% of U.S. business owners are over 50 years old, and many of them are looking toward retirement and the process of attracting and vetting potential buyers to take the reins.
Three major trends impact the salability of a business. Understanding these trends can help owners transition successfully in a challenging market, and ultimately identify the buyer who will carry their company’s torch going forward.
Baby Boomers are 2½ times more likely to own a business than the generations before or following. Faced with fierce competition on the pathway to success, many Boomers chose to chase the brass ring by going into business for themselves. Between 1975 (when the first Boomers turned 30), and 1986 the formation of new businesses in America jumped from 300,000 to 700,000 annually. New business start-ups have not reached that level since. The result is that nearly two-thirds of all businesses with fewer than 500 employees are in the hands of people who are preparing to retire.
The impact of the Baby Boomers at each stage of life created a one-time surge in many statistics. They tripled the number of college graduates, and brought over 50 million women into the workforce. Between 1970 and 1980 the population of the United States increased by 11%, but the employment base grew by an astonishing 29%. Replacing such a massive portion of the population in the business sector is no easy feat.
There are three major trends that challenge a small business owner preparing to exit. Like the movie The Perfect Storm, three trends — demographic, psychographic and sociographic — are combining to create a tsunami that will change the entire landscape of independent business ownership.
Young entrepreneurs have little interest in the service-oriented brick-and-mortar companies that dominate small business. They seek a level of freedom that doesn’t require being on call, schedules driven by customer convenience, or a 55 hour work-week. Combined with the sheer lack of prospective buyers, a reduction in the number of small businesses becomes more than likely, it is inevitable.
Yet, many small business owners are depending on their company to fund a comfortable retirement. Their plan goes something like this: “I will work really hard until I am tired, and then I will find some energetic younger person just like me who is willing to commit everything for this great opportunity.”
Fortunately, if you are a successful business owner, you’ve already proven your competitive instincts and abilities. With some planning and foresight, you can still beat the Boomer bust and achieve your retirement objectives. There are two pathways to succeeding in a crowded sales marketplace.
Creating your own successor requires a commitment to planning and development, but the financial aspects are fairly simple. A few years of selling equity in small amounts can let your successor build a minority stake. Then he or she can obtain third-party financing for the balance of the purchase so you can maintain control through the process, and take the proceeds with you when you leave.
Remember; “The more you work in your business, the less it is worth.” Everything you do to reduce your business’s dependence on your personal talents, to reduce the time commitment of running it, and to make it easier for any successor (whether internal or external) to take over the reins, also increases its value to any buyer.
You can’t change the factors that create the most competitive selling environment in history. Understanding what the future looks like, and realizing that your buyer is unlikely to be someone “just like me” is a critical first step in the process.