Michael Beck is an executive coach, business strategist and author. He is passionate about developing successors and preparing them to successfully run a company. His company offers leadership assessments and executive coaching, all designed to help successors succeed and owners get paid. For help assessing potential successors and developing them, or in setting up an ESOP, contact Beck at email@example.com. Learn more at elicitingexcellence.com.
Many people have heard about how baby boomer business owners will be retiring and the wave of business successions/exits that will occur as a result of those retirements.
But there’s a problem that almost no one is discussing. My research shows that there are not enough buyers for all those businesses, and the DME market is no exception. Here’s why, and what you can do about it.
The Small Business Administration reports that there are roughly 6 million small employers (1 to 499 employees) in the U.S. Of those, approximately 3.6 million are owned by people over 50 years old (baby boomers), and about 2.4 million are owned by people 30 to 50 years old (Generation X). Based on U.S. Census population statistics, this means about 4.5 percent of boomers own a business and about 3 percent of Gen Xers own a business.
Even if the inclination for Gen Xers to own a business rises to that of boomers, there is going to be a significant lack of demand for all those baby boomer businesses coming on the market—two-thirds of all boomer businesses won’t find a buyer. Where does that leave owners who can’t find individual buyers?
Following are the six options open to them:
1. Strategic Acquisition
There are always companies looking to acquire or merge with businesses that complement or expand their core business. This is strategic because it expands market share, affords economies of scale, or adds products and services that dovetail with or complete the current offerings of the acquiring company.
Considering the large number of businesses that will be hitting the market, only the most profitable, highest-regarded or fastest-growing businesses will be attractive at full-market value.
2. “Fire Sale” Acquisition
Businesses that could be candidates for a strategic acquisition but whose profits or growth curve are weak or are not quite a perfect fit in their offerings for an acquiring company may still be candidates for acquisition. However, they will not be able to command their full-market value. The only incentive to complete the deal will be to lower the asking price—sometimes significantly.
3. Sell to a Successor
One of the better options for many businesses will be to develop a successor and sell the company to them at full price. A successor may be one or more family members or one or more key executives within the organization. Some banks may be willing to fund the buyout, but as the number of businesses for sale increases, the majority of internal sales will be paid for out of future cash flows.
Identify a successor as soon as possible, determine whether they actually want to own and run the business, and then ensure that they are well prepared to be an effective leader and a successful owner. It generally requires one to two years of development to hone someone’s leadership capabilities, strategic thinking and judgment. Without that development, you run the risk of the business not being able to make the buyout payments.
4. Don’t Sell to a Successor
A variation of selling to a successor is to bring on a successor to run the company but not sell the stock. This option allows the owner to draw out the business’s value from the company while still owning it, but without needing to run it on a day-to-day basis. It requires finding and developing a strong successor, and then rewarding him or her for good performance.
5. Create an ESOP
In the absence of a strong successor, an option that will also yield full-market value is to set up an Employee Stock Ownership Plan (ESOP). This approach can increase employee loyalty and productivity, ensure business continuity and gain some tax advantages. An ESOP can be effective, but it requires one or two years of planning, along with the training and development of the people who will be directing the organization.
6. Close the Business
If a business can’t find an individual buyer, is not a candidate for acquisition, has no successor and is not able to structure an ESOP, the only course of action will be to close down the business and sell off the assets.
This is the least desirable outcome. I believe too many businesses will be facing this stark reality if they do not put plans in place at least two or three years prior to a planned retirement.
The Bottom Line
If your business is not in high demand, and you’d like to sell it for a reasonably strong price, the best course of action is to either develop a strong successor or structure an ESOP.