Why Many Baby Boomer Businesses May Fail in the Near Future
There has been a lot of activity and focus in the marketplace around succession and transition planning for baby boomers exiting their businesses.
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, which is a trend that is expected to last through 2030.
Ten TRILLION dollars’ worth of businesses will change hands in the next decade, according to several experts.
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.
Now consider that privately held businesses sold in 2018 numbered under 11,000. Even if that rate holds for the next 15 years, this number, compared to the total expected to come to market, is acutely small. Plainly stated – you cannot assume your company will sell when you are ready to exit.
If your business cannot be successfully sold (or transferred to the next generation), the remaining options are limited. You could work as long as you can without retiring, and/or sell the marketable assets in a liquidation. No doubt the assets will bring in some funds, but that process won’t capture the “going concern” value that the sale of an operating business can. And if you are like most owners, you have a sizeable amount of financial wealth locked in your business. Therefore, doing what you can now to make your business part of the successful sales number above is crucial to a well-funded retirement.
One of the key shifts in thinking for business owners is that they need to stop thinking like sellers and start thinking like buyers. But what if you don’t want to sell? Or what if you think your kids (or employees) will take it over? Guess what, they are buyers, too.
Baby boomers who have grown their business over the last 20+ years have focused on what they know. However, selling a business requires a different approach and way of thinking. Not preparing for the exit can result in disappointment in many areas. Some mistakes that are typically made:
Ignoring retirement – Most owners don’t want to retire. However, for all of us, the day will come when the demands of the business are too much. Planning for that day can make the transition easier, both mentally and physically.
Failing to plan for life-changing events – You may be the picture of health now, but an unexpected illness or situation that requires your time and attention could take you out of the office and put your business at risk. None of us want to think about the worst, but properly planning for those risks can put the business in a positive place and maintain the business legacy.
Inability to see waning passion – Losing the love for your business is normal. As with anything, years of doing the same things often leads to burn out. However, failing to address it can put your business at risk of losing its position in the market. This is especially dangerous if you haven’t evolved the company into a place where good talent wants to work.
Ill-prepared multi-generational ownership – Just because your children are interested in and/or work in the business doesn’t mean they should run the business. Failing to accept that your children aren’t the right future leaders of the company is important if you want to preserve the business for years to come and leave a legacy behind.
Diluted ownership – If you’ve been appeasing managers and other key team members with equity, you now have their interests to consider when it’s time to sell. This can make your ability to exit on your own terms next to impossible.
Lack of younger managers – If your entire management team is within five years of your own age, you’ve got a big potential brain drain that could occur in a short time frame. Not having key members who plan to stay on long-term makes the business less sustainable when all the key players retire and makes the business unattractive to potential buyers.
Misguided employee ownership plan – Assuming your top employees will want to take over the business can lead to a rude awakening when you realize they’re A) not capable of leading and making the tough decisions, or B) they never really saw themselves taking over for you.
Unrealistic business valuation – Just because you heard a competitor sold his business for $X million, doesn’t mean that your business is worth the same. Market conditions, business positioning, debt, management talent, etc., are all factors you’ll need to consider. You could find that your business is worth a lot less than you expected.
The good news is that by getting objective about your current situation, evaluating all your options, and making an informed decision as to the correct path for you, can minimize the chance of any of the 8 mistakes occurring. Also, bringing in an outside expert with a set of “fresh eyes” can help you see what you might be blind to in your business. If you’re one of the four million Baby Boomer business owners who have shaped business today, don’t let poor planning of your exit be what people remember most about your business legacy. Your departure is one of the most significant aspects of how you’ll be remembered by employees, peers, and your industry. It’s time to make sure your reputation you’ve worked a lifetime to build stays intact.
Jayne McQuillan, CPA, MBA, Certified Exit Planning Advisor (CEPA) is the owner of Journey Consulting, LLC