Each day, more than 10,000 Baby Boomers turn 62. Around this age, Americans, many of which are small business owners, start to think about their exit strategy from the workforce. For those working for someone else, the process is pretty standard.
You prepare financially, maybe your company hires a replacement for you and you train them, no big deal. When that magic day arrives; your co-workers give you a cake and send you on your way to a life filled with golf, travel or whatever you choose!
When Small Business Owners Retire -- What Are Their Options?
For a small business owner, the process is more complex and their decision to retire has an impact on many others. Many small business owners rely on the sale of their business to fund retirement so the process comes with high stakes. As an owner, there are several options when it comes to an exit strategy. They can sell their business completely, they can pass it on to the next generation to operate or they can maintain ownership but pass on the responsibility of day to day management and become an absentee owner.
I anticipate that over the next ten years as business owners make their plans a majority will decide to sell their business on the open market and walk away completely. Passing the business on to the next generation is great, if you have qualified children or relatives to pass it on to. While becoming an absentee owner and having that stream of residual income is nice, absentee ownership is hard to achieve with a lot of businesses so as I said, I think most owners will opt to sell their small business on the open market.
When Small Business Owners Retire -- Their Impact on Small Business Sales
If my prediction is correct and small business owners begin selling off their companies, the result will be a flooded market. For a buyer looking to acquire an existing small business, a flooded market represents great opportunities. They will have their choice of businesses to select from. They will be able to be picky and select the business that is most in line with what they are looking for. They will also be able to look at businesses and weed out those that are not performing well or have other issues that need to be addressed.
Let's not forget negotiation. In a flooded market, the buyer has power during negotiations. If one deal falls through, they know there will be another opportunity around the corner. The result "a buyer's market".
From a seller's perspective, this is not a good time to try and sell your own small business. With a lot of businesses up for sale, the competition among businesses will be intense. The best of the best will sell quickly, while others sit on the market waiting for a buyer that has the time, energy and enthusiasm to buy a business that is less than perfect.
This kind of saturation may cause prices to get driven down. If an owner waits to put his or her business on the market until they want to retire and it doesn't sell quickly because of competition, we may find owners slashing asking prices just to move the business. We also may see owners lowering their asking price to gain a competitive advantage over competing businesses for sale.
The good news for a seller is that buyers are ready to buy! It's no secret that now is the time to become a small business owner because of the surge of Baby Boomer's retiring. Many people that may not have considered ownership otherwise are thinking twice about buying a business and actually acting on it.
Another piece of good news for small business owners is that many existing business owners are seeing a busy marketplace as an opportunity to expand their operations through acquisition. They know that growing their own business could take years but acquiring another small business in the same field will basically grow their business over night.
Strategies for a Baby Boomer Ready to Sell
My advice to a Baby Boomer small business owner that is planning for retirement is to sell early and beat the rush. While it may not be the perfect time to retire, getting your business on the market before it becomes flooded will ensure you get the best price for your business and that you are able to sell it in a timely manner. If you are not ready to retire financially, consider building it into your sales agreement that you remain on staff as a paid employee until you can afford to retire completely.
Another strategy to consider is to contact a competitor you respect and let them know of your intention to retire. They may be interested in acquiring your company as a means of growing their business. I only recommend doing this if you respect your competitor. Part of a successful exit strategy is making sure your business ends up in the hands of someone who is going to be able to run it and pay their business purchase loan. No one wins if the business fails and you never get paid.
Baby Boomers That Buy Small Businesses
Another trend that is emerging is that Baby Boomers are buying small businesses after retirement. It sounds odd but if you think about it, it actually makes sense. Some people work their entire careers doing something they don't really love because it pays the bills. For some Baby Boomers that fall into that category, they are using retirement as a time to do something they love and buying a small business that offers something they are interested in.
For others buying a small business after retirement boils down to money; they want more income to enjoy retirement. They opt to buy a small business instead of working for someone else so they have the freedom they want with the residual income they need to enjoy retirement. Other Baby Boomers just aren't ready to retire and want to use the skills and experience they've gained throughout the course of their career to run a small business.
While this may sound like a positive thing because more small businesses are keeping their doors open, the problem is if a Baby Boomer has never worked in or owned a small business before they probably don't know how much work they are! While buying a business for the residual income sounds like a wise strategy, the reality is, it won't be that simple. Absentee ownership is not right for every business so Baby Boomers have to be careful when trying to implement this strategy or they could get more work than they wanted!
Industry Outlook
Based on what I have seen so far and with my knowledge of the industry, I think we are going to see a lot of small business go on the market within the next 5 to 20 years. Now is the time to get prepared if you are considering buying a small business because more and more are going on the market every day. If you're the person getting ready to sell, do it now. Don't wait until everyone else is selling because then you'll be at the mercy of the market. From my seat, it's great to see small businesses changing hands. When new owners come in, they often have fresh ideas which lead to good things for the company and for the people that work there. Sometimes change is good!
Contributor:
For over 25 years Peter Siegel, MBA has been providing niche business purchase financial advisory and loan placement services with SBA Loans, Non SBA Financing, Retirement Plan Conversions, Note Restructures, etc. Call me regarding business purchase financing and to get pre-qualified: 925-785-3118.
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