If you are a business owner whose most significant asset is your privately-held business, then the information in this newsletter may be of paramount importance to your financial future. With the largest generation in our country’s history entering retirement age, and many of the nation’s private businesses owned being run by Baby Boomers, it is becoming increasingly important to prepare for a future ownership transition. There is a current wave of exiting owners who have begun to transition their companies, this wave will likely change the landscape for the transfer of privately-held businesses, including your own.
Baby Boomer Owner Statistics
According to a study from the Pew Research Center, 26% of the total U.S. population are Baby Boomers. Moreover, the 2011 study says that “roughly 10,000 Baby Boomers turned 65 in 2015, and about 10,000 more will cross that threshold every day for the next 19 years.” That is roughly 3.6 million people per year and by 2030, all members of the Baby Boomer generation will have reached the age of 65.*
To put this statistic in perspective, it is further estimated that trillions of dollars of net worth from private businesses will be transferred during this time period.
The question that this newsletter focuses on is “with such a high supply of businesses in the process of transition, how will this impact any one individual owner’s ability to transition their company?”
The Case for Planning Prior to An Exit
Given the statistics just presented, a rather large argument can be made for planning prior to attempting any business transition in the future. With such an unprecedented number of exiting owners predicted to transition their companies, the need for a comprehensive and customized exit strategy plan for you and your business is likely crucial to achieving a satisfactory outcome.
Sometimes it is helpful to look at other areas of your life where planning precedes taking action to see if planning your exit makes sense. For example, it is likely that you started investing in stocks, bonds, and mutual funds before having a financial plan to guide your investment portfolio. You probably made a lot of mistakes and eventually realized that time and money invested in the planning process helps to educate and direct your investments. The same type of planning likely occurred for your estate, for your insurance needs as well as for your annual tax obligations to the government. The planning process is a collaborative process whereby you bring in outside expertise to assist you in conducting your affairs in proper order.
So, a strong case can be made for planning your exit in light of the large, expected wave of exiting owners.
Will Only the Strongest be Chosen
One area where you may benefit from the exit planning process is an understanding of your industry and activity for business transitions within it. Do retirement-age Baby Boomers dominate your industry? Has it matured, and is there likely to be growth or decline in the future?
Again, with such a large wave of exiting owners looking to transition their businesses, it makes sense that the weakest businesses and least-prepared owners will be left unable to successfully sell or transfer their businesses.
A Lack of Potential ‘Buyers’
Another area where you may benefit from the planning process is gaining an understanding of the potential buyers for your business. When we discuss the supply of businesses coming onto the market, it is also helpful to forecast potential demand from ‘buyers’. A buyer can be an outside party or an insider (or a group of insiders). One of today’s challenges with selling to insiders is that there is a cultural difference in how the Boomer generation perceives work and built their business and how the next generation approaches this same concept. In short, the generation behind the Boomers doesn’t want to work in the same manner, creating more of an imbalance between the number of business owners needing to sell or transfer and the number of willing buyers for these companies.
Planning for this Wave is a Team Event
A final point on how to plan for this wave of exiting owners goes to your professional advisors. Today, there are few advisors currently trained and prepared to give advice on a comprehensive approach for planning an exit strategy. The dynamics of orchestrating a successful business exit are very complex, and many advisors do not think broadly enough to head an owner’s “Exit Strategy Team.”
Your lawyer, accountant, and financial advisor will play crucial roles on this Exit Strategy Team, but a “quarterback,” or an advisor with the knowledge and experience needed to lead the team through one of the largest financial and emotional decisions in your life is necessary.
In the face of increasing competition amongst retiring Baby Boomer business owners and a changing business marketplace, a well-planned and adaptable exit strategy is likely necessary to achieve your desired exit outcome. Within the emerging wave of exiting owners, only the exiting owners with strong business models and well-planned exit strategies will be poised for successful transfers and, ultimately, a successful next stage of life. We hope that this newsletter has accomplished the goal of both educating you on the marketplace of exiting owners as well as effectively making the case for ‘the planned exit’.
* Pew Research Center http://www.pewresearch.org/daily-number/baby-boomers-retire/