Many business owners have the mistaken idea that retiring from their business will be a relatively simple process – they’ll just find a buyer when they’re ready to retire and live of the proceeds of the sale for the rest of their lives. In an ideal world this would be true. Unfortunately, the reality is much different. Except in rare circumstances, business owners cannot simply pick an age at which they want to sell or retire. There are number of things they have to be cognizant of, such as:
If selling to an outsider is your strategy, you would, of course, want to sell during a seller’s market so you can maximize the price. As we said in our book Cashing Out of Your Business, if history repeats itself, it’s likely that “the next prime selling time for privately held businesses will be 2013 to 2018.” And recently released data would seem to indicate this is definitely the case!
Data from BizBuySell.com’s recent Q2 2015 Insights report found that the number of small businesses listed for sale grew more than 12% from the same time last year. According to the report, we are now reaching levels not seen since 2009. “The increase in listings correlates to a number of factors, including growing small business financial performance and sale prices, and the volume of baby boomers reaching retirement age,” writes Bob House of BizBuySell.com.
According to the most recent “Market Pulse” report from Pepperdine University’s Graziadio School of Business and Management, sales of small businesses (annual revenue of less than $500,000) and medium-size businesses ($500,000 to $2 million), rose year-over-year in the fourth quarter of 2014.
Craig Everett, director of Pepperdine’s Private Capital Markets Project, quoted in NerdWallet.com, said: “This period showed a strong buyer’s market. Once you get past the smallest market sector, buyer advantage is definitely leveling off or actually switching to a seller’s market.”
Baby-boomer retirement is the number-one reason driving business sales across both the Main Street (businesses up to two million dollars in value) and Lower Middle Market sectors (businesses from two million to fifty million dollars in value). Baby-boomer business owners are flooding the market and this will likely continue during the next 10-plus years, as they hit retirement age or experience a life event, such as death, disability, or illness, and look to transition their businesses to others. However, this oversupply is likely to drive business values down.
As we have talked about frequently, historical statistics show that approximately one in five or 20% of businesses that attempt to sell, actually close on a transaction. And these were the statistics before the pending onslaught of businesses hit the market. It is predicted that the dissipation of personal wealth due to the inability to turn privately held family businesses into liquid assets (cash) will dramatically alter owner retirements and negatively impact future generations.
This is why business owners who are looking to transition out of their businesses need to be prepared, equipped, and “dressed” for success in order to stand out from the crowd!
By staying vigilant, you will know when to reinvent your business and when to sell (either internally or externally) so you can tap into the value, realize your gain, and get enough money to achieve your goals! And, make sure that you give yourself adequate time. Generally, we recommend starting to plan 3 to 5 years in advance.