What does the Housing Bubble Crash in 2008 and the Covid-19 Pandemic in 2020 have in common? These devastating catastrophes drastically affect Baby Boomer business owners’ retirement timelines and financial ability to transition out of their businesses. What does the Housing Bubble Crash in 2008 and the Covid-19 Pandemic in 2020 have in common? These devastating catastrophes drastically affect Baby Boomer business owners’ retirement timelines and financial ability to transition out of their businesses.
In 2008 the net worth for individuals aged 55-64 dropped by 33% . It took over a decade for some individual’s retirement savings to rebound to pre-2008 levels . It also reduced business values thus delaying the ability of business owners to sell their entities and retire. Twelve years later, the Covid-19 Pandemic is having the same -or even a worse – effect on an individual’s net worth and once again can inhibit the ability for Boomers to sell their businesses.
It is estimated that 80% of a business owner’s wealth is tied up in their companies (an illiquid asset). To add insult to injury, 45% of Boomers have no retirement savings. Only 55% of Boomers have some retirement savings and of those, 28% have less than $100,000.
Consider that the average age of a Boomer business owner is around 62 years. Younger Boomers may have time to recuperate from COVID-19 economic downturn, however for older Boomers do not have the same window of opportunity or time to recoup lost business value from economic disasters! For these same owners who’d like to sell and retire, competition may be fierce, as market may be flooded with huge supply of businesses for sale, creating a “buyer’s market.”
The supply side of this equation is projected to be around 9 million businesses on the market! This is based from the fact that 60% of the 15 million privately held businesses are owned by the Boomer Generation. The reality is that over the next 15 years the number of Boomer business owners looking for buyers will be staggering. According to the law of supply and demand – businesses for sale will surpass the number of buyers resulting in driving down valuations.
So, what steps can a business owner take to increase the odds of successfully transitioning their business to sell in 2020 and beyond?
Since most business owners only experience transitioning their business once it is critical that they do it right. A pivotal step in securing a successful sale of a business is to engage an adviser that has experience in succession/exit planning and who is a Certified Transition Planner. This advisor coordinates the integration of other professionals needed to sell a business such a business brokerage, legal, financial, tax and estate planning. The Transition Planner works for the seller and will assist in preparing the business owner both professionally and personally during the sale process.
I worked with one business owner who initially tried to sell their own business – solo. By taking on this monumental task they usurped time away from running the business. Sales suffered and consequently the market value of the business was ultimately reduced.
The next step is to develop a transition plan of which 85% of business owners do not one. A transition plan includes a desired time to sell the business, whether it is to be sold a third party or transferred to a family member. It also guides the business owner to make better decisions on how to run the business as if it will go on forever, but keep it on track to sell tomorrow. Those who do have a transition plan in place will increase their odds of selling the business.
Another step is to determine the value of your business. 98% of business owners don’t know the value one of their single largest asset – their company. Additionally, 78% of small business owners who need to sell their business to fund 60-100% of their retirement, begin this process without even knowing the value of their business. An, AM&AA industry study stated that 95% of owners overstate the value of their businesses resulting in major reasons deals fail. To eliminate the risk over valuing or under valuing your business obtain business valuation from a professional business valuator or a patented online valuation service like BizEquity.
Selling a business takes time. It can take several years to increase the market value of a business to the desired selling price to properly fund an insufficient retirement portfolio. By building enough time into a transition plan, the business owner maintains control of the process and reduces the effect of external influences such as the economy or having to sell due to death, divorce or disability.
Additionally, much like the stock market, the higher the risk the lower the stock price (value) the more stable the stock the higher the stock price (value.) Take definitive steps to de-risk a business will greatly help to make the business more appealing to buyers.
- Define and document your systems & processes, (i.e. Sales, manufacturing, services)
- Groom a successor to manage the business
- Prepare an estate plan
- Reduce your debt
- Improve your financial controls and reporting procedures
- Change the mindset of paying as little taxes as possible
- Update equipment and start preparing the business for the due diligence process.
In conclusion, The Business Owner with the foresight to understand, determine and maximize the value of their business will ultimately improve the factors surrounding the sale of their business. Preparation today will make your business more valuable and appealing to potential buyers.
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