The tsunami of business ownership transitions has been addressed in a previous posts but there is a two edged sword here for any Business 2 Business service operation. The two edged sword is that for some businesses the consolidation and acquisition of these businesses via the retirement of a baby boomer will increase your book of business. That should be a good thing. The other edge of the sword is that a survey by Price Waterhouse Coopers of business owners found that 40% of small business owners expected to CLOSE THEIR BUSINESS when they retire. This could have a dire impact on trusted advisors, insurance agency’s, Staffing , PEO’s, all Outsourcing, office supplies, phone carriers, copier and computer related sales. It is a serious phenomenon that is on the current horizon.
Even though the word is out that in the next ten years 50% of U.S. business will transition ownership. Why? Because Baby Boomers are getting ready to cash out! Some will pass on to the kids, grandkids or key employees. But most will be looking for a cash buyer. Here’s the rub, for the next five years there will be a flurry of activity with investors buying up businesses. There will be consolidation by bigger organizations buying up the smaller ones.
This is great news for growing B2B firms that are looking to make acquisitions and grow market share. But the danger is that what if 40% of your current client base were to shut the doors and retire. How would that affect your margins and ability to stay profitable? That is exactly what can happen. So while you are out there in a buyer’s market robbing Peter at below market prices, you may wake up and see that you are paying Paul with the loss of some long time clients who are shutting the doors.
How can you prepare for this? Well for one thing I suggest you keep an eye on the ownership of your current clients and have a discussion with them about any plans they may have for succession of ownership. You can’t discriminate against a business that has an older owner but you can try to be sure that you are going after the younger entrepreneurs very aggressively.
Another thought is to begin a program that would involve having yearly at the least meetings with your clients and create more of an associational atmosphere. Offer training and guest speakers on succession planning, how to build up the marketability of the business and strengthen the financials so that it is a viable target for sale. In essence the need to be more involved with your clients and encourage if not demand a more open and current relationship on the status of the business plan going forward. By encouraging the networking of the owners or clients you may in fact create a base of potential buyers for some of these businesses.
According to the SBA there are 28 million small employers (those with less than 500 employees) but of those 22 million are single person Sole proprietors so that leaves 6 million small businesses of which 3 million will change hands in the next ten years. The logical conclusion is that of the 22 million single employee sole proprietors more than forty percent will shut the doors.
According to the Private Equity Growth Capital Council there are 3300 Private Equity firms in the U.S. but only 547 of them are buyout growth expansion funds currently fundraising capital in the U.S.
So let’s say in the next five years you have half of 3 million small businesses that will sell and the best and most profitable will be competing for the attention of 547 firms? Then your next likely group of buyers is children and employees. Most of who is more risk adverse than the entrepreneurial baby boomers who created them. I know of three business owners right now who may have to shut the doors of thriving businesses for lack of buyer interest from the local community and family. As I mentioned earlier the survey by Price Waterhouse Coopers of business owners found that 40% of business owners expected to CLOSE THEIR BUSINESS when they retire. So out of the 3 million that will be transitioning 40% of those will close leaving the market share to the other 1.8 million who will be sold at some price. Business 2 Business companies will be scrambling just to keep on top of where the market share will end up.
Remember this is a Wake-Up-Call! Time to start the process of getting your client list organized so that you know beforehand who will close the doors and how to replace that market share. Time is ticking and you don’t have much time to wait for the feeding frenzy has already started and those who are asleep at the wheel or are in denial of the big picture will be in the group that loses the 40% who will end up shutting the doors. It is time to get real and flexible if you want to be able to beat the stampede that is coming up behind you.
By: Bob Eaton
Author/ Founder/ President Three Oaks Group
Parts of this article were excerpted and or referenced from the following links:
http://www.pegcc.org/education/pe-by-the-numbers/
http://www.forbes.com/sites/jasonnazar/2013/09/09/16-surprising-statistics-about-small-businesses/
http://exitpromise.com/business-exit-bubble-baby-boomers/
http://www.bizbuysell.com/seller_resources/the-8-burning-questions-every-buyer-wants-answered/8/