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It’s a seller’s market today but a perfect storm is brewing

Bob Wolter

Bob Wolter is a mergers and acquisitions advisor for CBS-Global, Green Bay, Wisconsin. He is a guest columnist for Cheese Market News®.

It’s a reasonably well-known fact that about 8,000 baby boomers will turn 65 years of age every day over the next 15 years. But a lesser known fact is that, according to the U.S. Census Bureau, 70 percent of all businesses or 4.2 million businesses are owned by people over 53 years old. What are the prospects for transferring those businesses when the owner is ready? The need to liquidate ownership will affect all of us, young and old alike, as the boomers try to capture the wealth that they have created. And there is good reason to believe that there is going to be far less of it than you might expect. In fact, the elements of a perfect storm are brewing.

If every owner in the over 53 group is depending on selling their business to fund the next stage of their life, the amount of capital required to close all those transactions is more than $10 trillion. Where is the money going to come from for those acquisitions?

There has been a stock market bubble, a housing bubble, a .com bubble but never before have we seen an owner demographic bubble. This “age wave” is coming like a tsunami.

There are currently about $535 billion in funds available (“private equity”) to acquire businesses, nowhere near the amount of equity needed to do even 10 percent of the transactions that will be up for sale. Even if fresh capital becomes available, the amount of supply will drive values down significantly.

Every 10 years there has been some kind of a recession. It is currently a seller’s market but the bull has had a long run and it’s going to get tired sometime over the next three years. When it does, it will become a buyer’s market of major proportions and only the stronger deals will get transacted.

There are multiple forces at work and together they are impacting the situation exponentially. One of those forces is lots of supply (businesses for sale). In addition to those businesses owned by retiring baby boomers, there are more than 7,700 companies in inventory that are currently owned by private equity firms that will become available. Furthermore, there are owners less than 65 years old who will be seeking capital for growth opportunities. There will be lots of competition for the retiring business owners and all of it will drive prices down.

There are not nearly enough funds to satisfy all the sellers looking to sell. Private equity fundraising will not be able to keep up. Limited funding will make buyers very selective and only A+ deals will get done and even they will have reduced purchase price multiples.

The economy goes in cycles and there is only about another three years left in the current seller’s market. Can an owner afford to wait it out until the market cycles back? It may take significantly longer than anytime in the past.

So, what is the result? Only the best deals — maybe the top 10 percent will get transacted. If owners miss this current cycle, they will have to wait at least eight years until the market starts to turn in favor of doing deals again, while all the while the baby boomers are flooding the market with their companies up for sale.

So, if you are a business owner with thoughts of selling in the next three years, how do you achieve getting your company in a very competitive position for a transaction?

First: Establish a sense of urgency and a realistic view of the value of your business today. Look at it the way a buyer would. Remember value for the buyer is based on what he or she can get out of it, not what you want to put into it.

Second: Get a road map developed now to increase value. This can be done without significant growth, dramatic improvement in earnings or even increasing your debt. Hitting the current seller’s market window means getting the business ready for the sale process in the next two years. It could very well take another year to find, negotiate and close on an acceptable transaction.

Third: Create priorities for how you focus your efforts over the next two or three years. You’ve spent a lifetime working “in” the business; now it’s time to start working “on” the business. This isn’t like selling your house where you can get it market ready in a month or so.

And finally: Get some help from an expert. The storm is coming and riding it out without eroding value will be extremely difficult. Find a professional who has a portfolio of clients that have done precisely this. You can’t go it alone and expect to be successful. You haven’t done it thus far and so you probably are ill-equipped to do it in the future. After all, you still have a business to run and other demands on your time. The “return on investment” on this kind of help is significant but there are not that many qualified advisors available who can help you plan and execute a value enhancement process that will get you where you need to be, well within that top 10 percent.

Boomers have been a driver of economic growth and consumer spending even before the early ’80s (remember the hula hoop?) when they started to reach their peak earning years. This group turbocharged rates of home ownership, consumer spending and most important of all, employment. Almost everyone has either paid or benefited from the taxes they have generated. Will their business ownership legacy be another boon or a victim of a perfect storm?

CMN

The views expressed by CMN’s guest columnists are their own opinions and do not necessarily reflect those of Cheese Market News®.

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