by Scott Bushkie, CBI, M&AMI
As Paul Revere once rode through the streets shouting, “The British are coming! The British are coming!” one could say, in the M&A world, it may finally be time to shout, “The Boomers are coming! The Boomers are coming!”
In fourth quarter 2012, a national study of the M&A industry found, for the first time, that Baby Boomer retirement is the number one reason driving business sales across all Main Street and lower middle market sectors.
The Market Pulse Survey, conducted by the IBBA, M&A Source, and Pepperdine University’s Graziadio School of Business and Management, previously found that potential tax increases, burn-out and family issues were the primary concern for some sectors.
Everyone thought the “great Boomer wealth transfer” would start about five years ago. In 2006, a study from the University of Dallas School of Management indicated a whopping 75 percent of business owners planned to sell by 2009.
Clearly, the recession forced many sellers to hold off. When we talk to boomer-age sellers, they confess to getting greedy or being too emotionally attached to let go during the good times. “Just one more year,” they thought. “Next year I’ll sell.” And then the bubble bursts and it is too late and sellers need to ride it out or sell for substantially less value than before.
But as we’ve seen over the last couple of decades, the economy grows and grows and then—with little to no warning—a bubble bursts. Business values can drop 30 to 40 percent in the span of a few weeks over things no business owner could control.
While many of the sellers entering the M&A market are in their mid-to-late 60s right now, we’re also seeing younger owners looking to get a little better value by getting ahead of the masses.
The Census Bureau Survey of Business Owners shows that in 2007, 45 to 54 year olds owned 33.1 percent of the businesses; owners 55 and older accounted for another 37 percent.
Using that and other data, SME Research calculated there were 2,736,752 businesses (with paid employees) in the U.S. owned by someone 55 and older in 2010. Assuming 50 to 75 percent of those owners want to sell, that puts 1.35 million to 2 million firms on the market in the next five to 10 years.
I’ve said this before, but one of the biggest mistakes I want people to avoid is waiting until they reach a certain age to sell. When selling a business, it is better to understand when the business reaches a value that will support the kind of retirement you want. When market forces align, that’s when you should sell.
You never know when the bubble will burst; recent history would say it is every 3-7 years. In this case, it cost some owners four years of retirement. Instead, they spent that time running a business through challenging, “unfun” times.
Market trends are positive right now and the lower middle market has more buyers than sellers available. According to the Market Pulse Survey, most brokers and intermediaries believe values will increase or stay the same for 2013. But remember the Boomers are coming and the market will shift to a buyers market driving down business values as they start to sell.