We hear every day about extreme weather happening all over this country. These reports unfortunately don’t mention the privately held small business tsunami that is coming.
Since January 1st 2011 about 8,000 “baby boomers” turn 65 each day. According to the U.S. Census Bureau more than four million businesses with more than one employee are owned by people over 53 years old. This equates to about 70% of the small businesses privately owned. A conservative estimate would suggest there are two million businesses owned by people who have reached the standard retirement age, and the number is growing every day.
An estimate of the capital needed to transfer these businesses from a retiree to a new owner exceeds five trillion dollars, and it is increasing every day. This gigantic wave of businesses transferring ownership is coming fast. A proper exit plan that will allow a business to stand out from the crowd and have a value higher than other similar businesses takes minimally a year, but more realistically three to five years to implement.
In addition, historically the business economy runs in cycles that average ten years give or take two years. Our current economic recovery as defined by economists is in its sixth year. This would suggest that every business owner who would like to retire before 2020 needs to immediately begin preparing for their exit. After the year 2020 values will decline from either the tremendous number of sellers in the market or the next downturn or both.
Another way to think about the tsunami is in terms of the economic value that will be destroyed. Like weather disasters in which the devastation wipes out wealth. In normal times less than a third of the businesses that are on the market for sale actually change hands. This small business tsunami will exacerbate this statistic. Again, only the businesses with an exit plan and a commitment to implementing the plan will result in a satisfactory transaction.
An exit planning advisor can help with creating the plan and guide the implementation. The ROI from engaging an advisor can be anywhere from nearly infinite – the difference between selling and closing - and at least a 10% increase in the selling price from reducing the buyer’s risk.
Reducing the buyer’s risk starts with knowing the elements of the business that are typically scrutinized the most and then spending time evaluating the business from a buyer’s perspective. An exit planning advisor has this perspective gained from many previous transactions that he can call on to create an exit plan.
Some typical areas that a buyer will closely evaluate include the management team who will remain with the business, revenue types, recurring or one time clients, customer concentrations, competitive advantage, financial records, and so on. An exit plan will address these and many other areas of the business.
An exit planning advisor can be considered part of your team to prepare for the small business tsunami. Like having someone cover your windows in advance of a hurricane or having someone dig a storm cellar in advance of a tornado or having someone place sandbags in advance of a flood the exit planning advisor will help you protect your wealth.