Posted by Tom Gledhill on Fri, Jan 29, 2010 @ 08:36 AM
We have all heard from multiple sources that, beginning now and for the next 15 years or so, the number of businesses for sale will increase substantially. We also know that the demographics support this since the majority of the businesses are owned by baby boomers, and the boomers are starting to retire. There are also numbers thrown around relating to this wealth transfer. A book has been written about the "$10 trillion dollar opportunity". Others claim the dollar amount to be much greater. Let's take a closer look at "the numbers behind the numbers".
Steve McNaughton and Dennis Roberts have written a White Paper for the Middle Market Investment Banking Association (MMIBA) titled "The Fabled Wealth Transfer: Urban Legend or Reality?". As one might suspect, the paper was written primarily for the middle market ($10 million to $500 million revenue companies) but in getting to the middle market the authors discuss the numbers associated with the universe of companies. According to the Federal Reserve Survey there were 350,000 companies sold in 2004 and the Survey projects that about 750,000 will be sold in 2009. So one can see that the number of businesses sold has increased dramatically. The US Census Bureau in 2002 estimate that there were a total of 5,697,759 businesses in the United States with one or more employees (some with many more) and that 79% of these businesses had revenues of $1 million or less. This leaves 4,501,229 businesses with at least 1 employee and revenues $1 million or less. It is also estimated that 70% of these businesses are owned by baby boomers so that leaves us with 3,150,860 businesses with 1 employee or more with revenues of $1 million or less owned by baby boomers. If you assume an average value of $350,000, that yields a market value of $1.12 trillion. Keep in mind that these are 2002 numbers and only companies with revenues of $1 million or less. If one used updated numbers and included all companies with revenues of $5 million or less, the market value of $1.12 trillion would increase substantially. Also, all these businesses will not be sold now, but will be sold gradually over the next 15 years or so. With any kind of growth over that period the total value of businesses sold will increase accordingly. The authors state that some economists place the total market value over the next several years of baby boomer middle market companies ($5 million to $500 million in revenue) to be over $50 trillion.
However you look at it the numbers are big! The authors do present a caveat: there will be an increasing number of businesses for sale going forward and a limited number of buyers. Consequently, business owners should strive to prepare their company for sale long before it is placed on the market.
Posted by Tom Gledhill on Fri, Jan 01, 2010 @ 12:13 PM
A few years ago I wrote an article titled "Selling your Business - why the time is now". The article related that period (late 2006) with the storm of 1991 in which 3 weather systems came together to produce "the Perfect Storm". This storm was so extraordinary that a movie was made about it starring George Clooney. In the article the 3 elements of the financial "Perfect Storm" were low interest rates, low capital gains, and the eagerness of banks to lend money. In the article I had asked many of my colleagues "how long will this last"? The consensus was "a couple of years". Well, in a couple of years we were in the greatest economic decline since the great depression. A pretty accurate forecast!
Supposing in the spring of 2008 you were thinking about selling your business. The business is doing well - good cash flow, competent, reliable employees, good relationships with vendors and customers, business growing, etc. You're a bit burned out, you would like to try something else, or you're close to retirement age and you would like to do some traveling. But you've got some ideas on how to increase the value of the business and you think "If I hang on for another year I can increase the value of this business by X%" and so that is what you decide to do. In a few short months you realize that it was a bad decision.
The recent recession was an event that you had no control over. Other events that you have little control over are death and disability. Even divorce has been known to happen quickly. What else can happen? You may not have the energy and enthusiasm to accomplish your goals. Your ideas may be old and are no longer pertinent in this ever-changing world. And you may not be able to implement them even though you had the energy and enthusiasm to do so. What's the name of that law that states "whatever can go wrong will go wrong"? Oh yeah - Murphy's Law! There a lot of ways that hanging on for another year could decrease the value of your business.
Where are we now? Low interest rates and low capital gains are still hanging in there. Banks' eagerness to lend is history (for now). Capital gains are automatically scheduled to increase in 2011 and it could increase sooner. Interest rates will increase as the economy improves. The financial "perfect storm" has blown out to sea!
But there are some bright spots. One is that the economy is improving. Another is that the banks are slowly becoming less rigid in their lending policies. Also, there are many buyers who have experienced corporate downsizing or corporate burnout (tired of airports) and they are looking to settle down with their own business. And interest rates and capital gains remain attractive (for now).
So is this the right time to sell your business? Only you can answer that. But if you feel that the business needs work before you can sell (i.e. you need to increase sales) - make sure that you have the energy to get the work done. If you've lost the enthusiasm you used to have for the business, it could be worth less a year from now. If your gut tells you it is time to sell, then it probably is time to sell.