You Can’t Take It With You! No . . . I Mean Your Business!
Courtesy of Goodfuneralguide.co.uk
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. But wait! Don’t you think there will be a tipping point where the investors will be sated with their appetite for growth and have to get busy with the scaling and controlling of the growth they have just acquired?
If that happens and I am positive it will, then like musical chairs, all you hold outs may be in a buyer’s market. A market with fewer buyers looking and you will be competing with others to make your business more attractive (code for cheaper) and trying to get the attention of qualified buyers who won’t mistreat your employees and clients/ customers.
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.
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. A 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.
There seems to be a need for thoughtful urgency to get the business lined up for a buyer. That is best accomplished by looking at it as a buyer and not as the emotional seller. The buyer will be dispassionate about your business because they have many to choose from.
According to BizBuySell they will be looking at 8 key issues the top three in my opinion will be.
First, are the numbers provable? Do you have audited financials? Are they re-casted or normalized to show the buyer the future potential cash flow? Have you a set of books that shows me what perks you are taking against the future potential earnings? Can you show recasted financials subtracting the premium high salaries to family members or the company cars, phones and business expenses that are above and beyond what a frugal new owner would have?
Second, what does the future hold? Not only are the decisions made on accurate historical numbers but also on sustainability of that trend. The majority of buyers want to know that history will repeat itself. In other words, the business is sustainable, that there are no looming threats that could drastically alter the business or impact it negatively after they buy. Pending lawsuits? Closing of the largest employer or client? you get the picture.
Third, can it be financed? Cash sales of businesses are rare, and are usually accompanied by a major discount. Serious buyers understand they will have to put down a substantial deposit but everyone wants leverage. There are three possible options for financing:
• Traditional lenders
• Government backed programs such as the SBA loan program in the USA
• Seller financing
Most business buyers are first-timers and incorrectly assume that banks have their vaults open to lend them money to buy a business. It is simply not the case. However, a serious buyer knows and the inexperienced soon learn that they have to put their money down on a business.
SBA type programs are growing in popularity however the criteria that the business and the buyer must possess limits the number of these type of transactions to under ten percent of small business purchases.
Seller financing in most US markets is quite common and is something you need to seriously consider and buyers expect it. While there is always a risk, offering financing for part of the deal will not only drastically increase the buyer pool, it will generally allow you to get a better price and provide some added assurances to the buyer that you too have “skin in the game”.
Remember the title was you can’t take it with you and the point of this article is that it is a Wake-Up-Call! Time to start the process of getting your business ready to sell and know what you are worth and what you can do to present it against massive competition for the available buyers. 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 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/