There is a lot of excitement about the huge transfer of wealth that’s supposed to occur as baby boomer business owners begin to take retirement over the next 5 to 10 years. Call me underwhelmed.
The SBA says there are 12 million businesses in America owned by baby boomers. Business brokers, accountants and financial planners love to talk about the imminent “tsunami” of business sales, the theory being as these 12 million owners sell their businesses, there will be a huge transfer of wealth with resulting consulting/management/brokerage opportunities. However, I believe this tsunami is more likely to be a tiny ripple because most of these 12 million businesses are not sellable. Many will simply close or transfer to someone with little to no equity exchanged. However, if a business owner has two to three years before they want to sell their business, there are specific things that can be done to improve their chances of selling.
# 1 Know the business’ market value. Most 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; or 2) the owner has decided what he/she needs to fund their retirement, and that’s how they establish the asking price for their business; or 3) the owner is emotionally attached to his business and believes it is worth more than it really is. But duh ….. if the business goes to market over-priced, it is not going to sell. The market isn’t stupid.
#2 Make the business sustainable without you. Many baby boomer-owned businesses are a reflection of the owner, meaning the owner IS the business, and when he/she leaves, the business is likely to fall 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. To be blunt, they are buying a job. 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 with cash flow to supports his salary expectation. If the business cannot sustain a solid corporate-level salary now, it’s not likely that corporate refugee will want to buy it.
#4 Be prepared to finance some of the purchase. Many of the small businesses I see are not bankable, meaning a prospective buyer cannot get a bank loan to make an acquisition. There are many reasons this can be the case, the most prevalent being the business’ lack of reliable financial records, insufficient assets that can be attached, or unpredictability in the business’ cash flow. If the business owner is not willing to take part of the purchase price in the form of the note, that owner is less likely to sell their 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 is bankable, many deals fall apart when doubt enters during the due diligence. Doubt is the cancer of due diligence, and 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. Once you hear doubt from the buyer and/or his advisor in the course of due diligence, be quick to respond because, like cancer, doubt that festers can cause real problems. Sometimes you can forecast this doubt before it enters the conversation; be proactive to identify advance areas of potential doubt, and have strategies to address it.
It’s no fun telling a business owner their business is not sellable, especially when that owner needs to retire. Two or three years of advance planning will go a long way helping the baby boomer business owner avoid this very unpleasant conversation.
Moral of the story: Don’t wait until you need to sell your business to plan to sell your business
Tennessee Valley Group
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