In an ideal world, every business owner would be prepared for an exit at any given time. Today there are many small business owners who are seeing their business profits return to levels that have not been seen since prior to the impact the Pandemic made on the economy. However, despite this increase in overall profitability in privately-held businesses, many owners are still waiting to exit. It can be scary to take that leap into stepping out to sell what you’ve worked so hard to build. This newsletter is written to compare the benefits of waiting for an exit (perhaps with an expectation of further increases in profits) versus the drawbacks of the impact inflation and increasing interest rates may have on your bottom line. Additionally, a crowded marketplace of sellers is expected as Baby Boomers continue to exit their private businesses, there’s also the innate risk that comes with private business in and of itself.
Inflation and Increasing Interest Rates Can Have an Effect on Your Business
Inflation is at a 40-year high in 2022. This increases the costs of goods and supplies a small business may require to successfully operate resulting in tighter profit margins. Small businesses may lack the capital to fund these and other increasing costs like offering competitive employee salaries and benefits. Making it increasingly difficult to retain quality talent in an already tight labor market.
The Current Marketplace and the Pending Retirement of Millions of Baby Boomer Owners
The leading baby boomers, those born between 1946 and 1964, turned 69 in 2015. Since a majority of businesses in the United States are owned by these boomers, there is a continued expectation of sellers looking to cash in their businesses as they tire and age. If the marketplace of exiting owners gets too crowded because everyone is done waiting, you, the exiting owner, may not fetch the same price as more selling baby boomers come into the marketplace. Moreover, it may be the case that you don’t get a deal done at all because you are competing with so many other sellers.
Today, there is a ‘seller’s market’ for profitable, transferable businesses. The future, however, is a bit uncertain with such large dynamics at work. Plus, there is the additional risk of interest rates increasing, making borrowing more expensive to finance transactions, thereby also lowering prices that a buyer can pay.
Finally, and not insignificantly, owners who wait to exit continue to assume the risks of running their businesses. These risks include company risks, i.e., something can happen to you, to your business, or to your industry, including changes to the overall marketplace. In addition, owners who wait to exit bear the opportunity risk of having liquid dollars today appreciate over the next few years. If you were to cash in your company and gain that financial security from your otherwise illiquid business.
All owners’ companies and their situations are different. Regardless of the specific application of these issues to you and your company, it is helpful to think in these terms so that you can make a fully informed decision about the future transition of your business. Interest rates are only one reason to consider an exit today. Beyond that there are many other compelling, possible scenarios that arise from delaying the sale of your business. Don’t let fear hold you back from making the next step. Each owner needs to weigh the pros of holding onto their company against the risks of delaying an exit. This newsletter sought to make the point that waiting to exit may cost much more than one anticipates, particularly in light of the trend of the marketplace dynamics as well as interest rates and other factors. We hope that this newsletter accomplished the objective of getting you to think about your exit in a broad sense, considering all of these factors to help you arrive at clear decisions about the right time to exit for you.