There’s a lot of talk these days about the huge transfer of wealth that’s going to occur over the next 5-10 years as baby boomer business owners decide to take retirement.
The SBA says there are 12 million businesses in America owned by baby boomers. Business brokers, accounting firms and financial planners love to talk about this coming “tsunami”, the theory being as these 12 million owners sell their businesses, there’s going to be a huge transfer of wealth with resulting consulting/management/brokerage opportunities. But based on my experience and studied opinion, this tsunami is more likely to be a tiny ripple because most of these 12 million businesses will not sell. Many will simply close and go away, or transfer to someone with little to no equity exchanged.
Before you write me off as a pessimist, let me explain my market-tested reasoning, because if you have two to three years left before you want to sell your business, there are specific things you can do to improve your chances of selling.
# 1 Understand your market value. Almost all small businesses go to market overpriced because: 1) an unethical or inexperienced business broker gives the owner an inflated expectation just to get the engagement; 2) the owner has decided what he/she needs to fund their retirement (which might be totally unrelated to the market value of their business); and/or 3) the owner is emotionally attached to his business and simply believes it is worth more than it really is. But if you go to market over-priced, you are more likely to NOT sell than to negotiate down to a price you like.
#2 Make the business sustainable without you. Many of the baby boomer-owned businesses I see are simply a reflection of the owner, meaning the owner IS the business and when he/she leaves, the business falls apart. This is especially true with professional services such as law, accounting, and medical practices. You know your business is ready to go to market when you can be out for a month and it not hurt the cash flow of the business.
#3 Remember why someone is looking to buy a business. In most cases, the buyer of a small business is first looking to have his/her salary needs met. They are, so to speak, buying a job. For example, if a buyer is leaving a corporate job because he wants to be an entrepreneur, the first thing he will look for is a business that has a cash flow to supports his salary expectation. It is important for the business seller to understand this because if your business can’t support you now, it’s not likely somebody else will want to buy it.
#4 Be prepared to finance some of the purchase. Many of the small business transactions I see simply are not bankable, meaning the buyer cannot get a bank loan. There are many reasons this can be the case, the most prevalent seem to be lack of reliable financial records, insufficient assets that can be attached, or unpredictability in the business’ cash flow. If you are not willing to take of the purchase price in the form of the note, you are more likely to not sell your business.
#5 Be proactive in due diligence. Even if a business is priced right, is sustainable after the owner leaves, supports a buyer’s salary needs, and passes muster with a bank, many deals fall apart when doubt enters during the due diligence. Doubt is the cancer of due diligence, once it’s there, it’s hard to get rid of it. Doubt comes in many forms, it might be something on financial statement that isn’t properly coded, it might be concern about customer concentration, or it might be the errant comment of an employee or key customer. Sometimes you can forecast this doubt before it happens so be proactive to identify it in advance and have strategies to address it. But if you hear doubt from the buyer and/or his advisor in the course of due diligence, you must be quick to respond because, like cancer, doubt that festers can cause the train to come off the track.
If you are considering selling your Tennessee or Kentucky-based business, give me a call or drop me an email and we can talk through how your business might handle one or more of these issues. Buyers are definitely out there, but they are not going to come throwing money at you unless you are prepared.
Tennessee Valley Group
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