Succession planning: The rise of the seller tsunami
As we speed toward 2020, a trend in business sales continues to emerge
Succession planning is a crucial phase in the life of any successful business owner – and the lifespan of any enduring business – just as creating a business plan is vital at the outset of any serious enterprise.
In this three-part series on succession planning, experts in the field will demystify the process and provide expert guidance on issues ranging from financial advisement to legalities to taxation.
Succession planning isn’t a process to take lightly, but it need not be a source of anxiety and uncertainty, either. By familiarizing yourself with these professional services and learning what they do, you’ll realize you have allies in this often-overlooked phase of business.
During the years following World War II from 1946 to 1964, a wild uptick in births blossomed across the nation. This generation became known as the “baby boomers.” This was a generation defined by growing affluence, optimism, ambition and sometimes consumerism excess blasting through the limitations of wartime America. With these traits at hand and a steady dose of American Dream rhetoric, it is no wonder baby boomers have become one of the most entrepreneurial generations of our time, owning nearly 60% of all U.S. small businesses.
As we speed toward 2020, a trend in business sales continues to emerge. Year over year, we have noticed a dependable 10% increase in boomer business owners selling their businesses to retire, and this trend won’t likely peak until 2024 when the youngest boomers reach age 60 (source: Transworld Data). Referred to as the seller tsunami, this trend will precipitate technological and cultural shifts that will change the small business landscape as we know it and bring with it bright and shiny opportunity. This opportunity will mean a high volume of amazing businesses with history and reputation, current customers and positive cash flow for business buyers to purchase. It will mean plentiful growth through acquisition opportunities, especially for mini roll ups; and it will mean the opportunity to modernize, innovate and implement minute changes to increase cash flow for a business owner.
While boomer-owned businesses are certainly sound financially and have fully recovered from the loss of value caused by the 2009 recession, they are not necessarily known to be technology-oriented. When millennials and other younger generations with plentiful disposable income acquire these businesses, a large-scale technological shift will occur. We can expect to see small and simple technological implementations as well as large, fully automated processes emerge within these companies.
Simple shifts may include the addition of more comprehensive data collection using customer-relationship management software and marketing technology solutions as well as delving into the world of buyer-intent data continuing to home in on a data-centric approach to decision making. Larger-scale projects will include nods to artificial intelligence and automation that we are beginning to see more and more across all industries, as well as additional vendor outsourcing to streamline operations.
More interesting than an increasing reliance on technology will be the cultural shifts that begin to emerge based on the core values of boomer business owners versus their younger counterparts. Boomers are heavily focused on work as an anchor in their lives. Xers and millennials are much more flexible and focus on a work-life balance that doesn’t exist for boomers. They’re also open to change, which gives them a propensity for taking an innovative approach to their leadership and, of course, they’re both very tech-savvy. Because of this difference in value systems, acquired businesses are going to evolve to offer better benefits to employees and will include flexible and remote work environments like the ever-popular coworking space, which has taken hold of Denver and many other metro areas.
Another interesting change will be how acquired businesses will work to attract employees. Younger business owners put a lot of intention into the culture of their companies and creating a good work environment. To attract new employees, they showcase their 401(k) benefits, office perks like free food and recreation, wellness plans and unlimited paid time off.
As the number of boomer businesses listed for sale grows, you might ask who are the main parties we will see buying them. You may be surprised to hear that there will, in fact, be boomer-to-boomer trades. Younger boomers are ready to take advantage of the growth opportunities, and basically perform a 10-year fix and flip, and then capitalize on the sale for their own retirement. There will, of course, be a number of Generation Xers and millennials buying businesses. The Xers are not only the largest portion of the U.S. population at 82 million but they also hold more disposable income than the other generations, making them primed for investment opportunities.
Additionally, one of the best ways to sell a company is actually to its employees through an ESOP, or Employee Stock Ownership Plan. However, this option is fairly cost inefficient, so historically it has only been accessible to companies bringing in more than $5 million in revenue. In response to the trending seller tsunami, Kirsten Gillibrand, a Democratic senator from New York, has sponsored the Main Street Employee Ownership Act of 2018, which would amend the Small Business Act and make it possible for the Small Business Administration to guarantee loans for qualified employee trusts of a small business to purchase the stock of that business. Whether this act will have a chance to help address the exodus of boomers from their ownership roles remains to be seen.
Looking to the future of small business mergers and acquisitions, nearly 9 million businesses will transition to new ownership as boomers sell for retirement. This growing influx of business listings, which have already been steadily increasing, will flood the normal market volume at five to 10 times the regular inventory. The larger inventory will likely bring business valuations down, increasing the opportunity for buyers to sail into ownership roles. Transworld is theorizing that the uncertainty that often mounts with an election year could finally spur the peak of the tsunami. Only time will tell when the peak will come, but one thing for sure is that valuations are still high, buyers and financing are plentiful and the market is ripe for ownership opportunities and funding retirement.
(This sponsored content is provided by Transworld Business Advisors.)
Jessica Fialkovich is president of Transworld Business Advisors – Rocky Mountain and Transworld Commercial Real Estate, working mainly with owners bringing in under $20 million in revenue. For more information, contact: email@example.com or 720-259-5099.