Retiring in a seller's market
During the Great Recession, 170,000 small businesses closed in just two years. Others struggled to get by as profits were wiped out and expansion plans were canceled. Tens of thousands of business owners were rebuilding from the economic fall that followed Sept. 11, and many industries had been marked by major technology shifts or scandals, as in the case of Enron. For baby boomers, this meant plans to transfer or sell their businesses and retire were undone, and they were forced to drag out more meager livings than they were promised.
Boomers own 12 million U.S. businesses, and the family business represents most of the personal wealth for small and midsized business owners. The recession decimated markets and individual businesses stuck with no room to grow and nowhere to go. The medical advancements that let baby boomers live longer, more able lives than their parents led many to use that time to delay retirement and build their companies back up.
This has created a pool of businesses worth tens of billions of dollars whose owners are projected to transfer them to heirs or sell them to investors or competitors. In preparation for this great transference, private equity firms, private investors and others have gathered massive capital to target this expected boom in boomer business sales. That boom has yet to come. It's years overdue. But the market is ready.
M&A advisory firms are experiencing a rise in investors looking for quality business acquisition targets. Those lucky owners who escaped the more dramatic effects of the recession can take advantage of this seller's market now and sell high, their health still with them. The current economy is strong, and there is an expected wave of baby boomers looking to sell their businesses. Valuation multiples in business acquisitions tend to be highly volatile and are sensitive to supply and demand pressures, history has shown us. With the current shortage of inventory and readily available financing, rates are near historic highs.
Traditionally, people dedicated their lives to a single career and their employer guided them through savings and investment options, which promised enough equity to provide financial stability after retirement. Previous generations worked about 30 years and then exited the workforce as they were replaced by the incoming generation. This was expected of the baby boomer generation as well. Speculations about how this generational transition would affect health care and labor markets projected major disruptions in the workforce, with the added cost of wide-scale increases in health care service needs. However, neither the health care nor labor speculations came true, generating further uncertainty about the future of the two markets. These forecasts, however, undervalue the effects of the two financial system disruptions experienced by this generation.
In 1997, Enron started experiencing losses, and executives at the company made the decision to implement structured finance as a means to hide signs of trouble. Three years later, stock market analysts began to question the valuation of the company. The Enron scandal broke in 2001. A company once valued as high as $90.75 per share had taken part in a series of deceptive business practices that eventually resulted in massive job loss, the evaporation of retirement portfolios and criminal prosecutions. Investors dumped their stock, plummeting Enron value to under $1 per share. The decisions of the executives at Enron destroyed the retirement plans of workers and forced them to remain in the job market, or forced recent retirees to return to the workforce.
As the United States heightened its presence in the Middle East, war efforts created a boon for the economy in the early 2000s and assisted in the recovery of a damaged business market. Then, in 2007, the housing bubble broke. This revealed a system of subprime lending fueled by leading bank institutions and a series of large insurance companies supporting them. Inevitably, borrowers were unable to repay loans or refinance. Banks and insurers collapsed and required federally subsidized bailouts to save an already plummeting economy.
A year later, in 2008, Bernie Madoff's scandal broke: He had pulled off the biggest Ponzi scheme in American history. People lost their homes, businesses closed, companies laid off employees, and retirement portfolios disappeared again. Boomers on the edge of retirement were forced to weather another storm, this time with less and less time left to gain back lost capital. The cost of living continues to rise, and fewer people feel secure letting go of a successful income-generating asset. It is easy to understand why so many people have pushed back retirement in favor of a few more years of gathering income.
Various stimulus packages restored growth to the economy. In the last eight years, baby boomers have recaptured as much as they can while the market is good. At the same time, buyers are paying top dollar to invest and acquire companies for their own portfolios, partly because they have so few options. Advisors warn that knowing the next market disruption will happen is important, but they advise against trying to predict it. When economies are weak, the market becomes saturated. Buyers become cautious and selective. In these situations, sellers are stuck with struggling businesses, are forced to sell pennies on the dollar, or devote years to work their way out of the economic crisis. It is smart, then, to plan an exit strategy now.
Private equity investment firms have spent the past few years raising funds in preparation for the expected baby boomer retirement market boom. Business owners, trying to squeeze a few more years of profit and growth, will sell later at lower valuations. Sellers are experiencing quick sales at historic EBITDA multiples. Trends are showing that even small businesses are attractive to private equity investors – an interesting feature of this unusual climate. Typically, private equity firms require an EBITDA value over $2 million. In this market, deals have been made with EBITDA cash flow levels as low as $500,000, mainly due to the flexibility for sellers in a wide-open market. These small and less profitable businesses can only enjoy these market conditions now, while they last.
As baby boomers age and experience ailing health, their interest to sell will be forced, the business broker and M&A advisory industry predicts. This seller's market will not last. The switch to a buyer's market will result in lower returns for sellers, as buyers sift through an oversaturated business pool. Strong, high-profit companies will still find buyers, but they will sell for much less than they would now, while the demand for business is higher than the supply. The tipping point is expected to occur in the next five years. Entrepreneurs who do not act now may lose their chance altogether.
History is cyclical. These last few decades have shown us that the future is full of ups, downs and scandals. The market is not a steady ship. Uncertainty has prevented many baby boomers from offering their businesses as they retire. Timing is everything. For a business owner who wants to capitalize on their life's work, now may be the time to get out while the money is there.