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The Numbers Don’t LieWhy you should care about Baby Boomer demographics when thinking

about a successful future exit from your business

This document is attorney advertising and does not constitute legal advice.

Although this article is applicable to a broader population, it is written with a special eye toward Baby Boomer owners of lower middle-market businesses. Why? First, because Baby Boomer business owners will be most affected by the demographics of which they are a part. Second, because lower middle-market businesses historically represent a major share of all annual business sales. Thus they’ll be the most affected by factors that alter supply and demand mechanics.

By definition, a Baby Boomer is someone born between 1946 and 1964. That’s more than 75,000,000 people in the U.S., more than 26% of our total population. Baby Boomers became better educated than prior generations of Americans. Interestingly, the percentage of Baby Boomers who attended or graduated from college is higher than the later generations, as well. Baby Boomers are stereotyped as having optimistic, competitive, “can do” personalities. No doubt because of those characteristics, Baby Boomers own a significant percentage of the privately-held businesses that operate in our country right now.

It’s extremely difficult to obtain precise, consistent information about how many “businesses” operate in this country, much less how many of those businesses are owned by Baby Boomers and how many of those fall into the lower middle-market segment. The SBA reports that there are over 28,000,000 small businesses in this country. A “small business,” for SBA reporting purposes, is an entity with fewer than 500 employees. There are estimates that as many as 12,000,000 of those businesses are owned and operated by Baby Boomers.

Many of those 12,000,000 businesses, though, are essentially sole proprietorships in which the business is the owner. The more salient number for purposes of examining the effect of demographics on sales of private businesses is the number of small businesses that employ others. In 2014, the SBA identified 5,707,941 U.S. businesses as falling into that category (large enough to hire others but more than 500 others). There were 114,500 businesses in the State of Minnesota that had between 1 and 500 employees.

The most consistently repeated estimate is that approximately 4,000,000 of the businesses with employees in the United States are owned by Baby Boomers. A few of those businesses fall into the SBA’s large business category. The vast majority, though, are lower middle-market enterprises with annual revenues of anywhere from one to a hundred million dollars.

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ThoseWild and CrazyBaby Boomers

Beginning in 2011, about 10,000 Baby Boomers in this country started turning 65 every day. That trend will continue to be the case through 2029.

Baby Boomer demographics will have a big impact on our national and State workforces. In the current decade (2010-2020), nearly as many people will turn 65 as in the prior four decades combined. The next decade (the 2020’s) will see an even greater number of people reaching retirement age. As mentioned, that surge will end by 2029. However our national and State economies will have undergone fundamental changes during the surge period.

One Baby Boomer demographic issue with which we’ll have to deal is its effect on the overall economy. A high rate of retirements tends to result in slower “natural” work force growth, and lower work force growth rates historically translate to slower economic growth. The ratio of workers to retirees in the State of Minnesota will reduce from 5:1 in 2010 to 4:1 in 2020 to 3:1 in 2030. By the 2020’s, Minnesota’s labor force growth rate is predicted to be at record-low levels. Employers will be challenged to increase per-worker productivity or to source labor in other ways in order to maintain vibrant State and national economies.


The Effect of Baby Boomer Demographics on the Economy

Within that potentially challenging economic climate, what do Baby Boomer demographic trends likely mean in terms of sales of lower middle-market businesses?

Some have estimated that 65%-75% of all “small businesses” in the U.S., of which the 4,000,000 Baby Boomer-owned companies with employees is a subset, will put themselves up for sale during the next 10 years. The flood of businesses being offered for sale in the next 10-15 years is impacted by the “not the right time” decisions of business owners who may have otherwise sold their businesses during the Recession or who are reluctant to sell during a time when interest rates being paid on “safe” investment of business sale proceeds continue at a low-water mark. Nevertheless, the desire to do something else--or health or other considerations--will cause the trigger to be pulled in short order on the vast majority of Baby Boomer-owned businesses. In fact, the pace may accelerate if the flood of businesses becoming available for purchase has a predictable result on purchase prices for those businesses.

The estimates on number of quality businesses coming onto the market supports predictions that the next 15 years will entail the largest intergenerational transfer of private businesses in the history of the world. Researchers have estimated that more than $10 trillion in business assets may be transferred between the start of the Baby Boomer exit era and 2025.

If the estimated 4,000,000 offerings of privately-held Baby Boomer businesses were uniformly spread over a 15-year period, that would mean that about 267,000 Baby Boomer businesses will be changing hands every year. Comparison of up-coming lower middle-market business sales activities to anything that we’re used to seeing has proven impossible to accurately quantify. However, the overwhelming consensus of those who have examined the issue is that we are at the front end of a tsunami-effect increase in the number of businesses flooding the market.

The Tsunami of Baby Boomer Business Sales



The supply and demand effect of the wave of businesses coming onto the market is obvious. What isn’t as obvious is how dramatic the effect on business valuations, especially of well-managed companies, will be. There remains an abundance of capital available to invest. However the likelihood is low that everyone with a profitable business will enjoy the types of EBITDA multiples currently being paid.

One thing that is known is that a decrease in valuation of a business owned by a Baby Boomer is likely to have a dramatic effect on the net worth of the Baby Boomer’s net worth. A study of owners of private businesses in the U.S. revealed that “about 75 percent of all private equity in this country is owned by households for whom it constitutes at least half of their total net worth. Furthermore, households with entrepreneurial equity invest on average more than 70 percent of their private holdings in a single private company.” (Moskowitz and Vissing-Jorgensen)

In short, an unprecedented number of privately-held businesses representing the lion’s share of the owner’s net worth will be coming onto the market during a confined period of time---and in a setting where overall economic growth, and confidence in the economy, may be challenged. That will cause buyers to become more acutely aware of differences between the choices available to them. Those sellers who cannot demonstrate distinctiveness and transferability will become marginalized.

Potential Effect onNet Worths

of Baby BoomerBusiness Owners

One potential response to statistical-based conclusions is to label them “bad science” and simply embrace denial. Things have always worked out. Why shouldn’t they again? If you fall into this category, read no more. There’s nothing that’s coming that will be of interest to you.

For those who recognize the inevitability of a landscape change, the challenge is to put that knowledge to productive use.

One alternative, of course, is to give in to sheer panic. Regardless of what’s right for your life, rush out to sell or liquidate your business before it’s too late. A panic reaction, though, is probably an indicator that your business is not as ready for sale as it needs to be to meet your retirement needs.

For some Baby Boomers, accelerating the timing of sale of their businesses may be a prudent decision. The values of their businesses may be at a high point and the cost associated with waiting to sell may outweigh the personal reasons for not otherwise wanting to pull the trigger now. However, that decision should be based on a reliable understanding of (a) what an owner requires in net proceeds of sale of his/her business in order to meet defined expectations for the remainder of the owner’s life, (b) what the business is worth right now, and (c) what, if anything, can be done to maintain or enhance that value if this is not otherwise the right personal time to sell, or if current value doesn’t meet retirement needs.

Another alternative, after undertaking the type of audit described above, is to prudently invest in ensuring that your business will be viewed by future buyers as distinctive and valuable even if there are a lot more contestants in the beauty contest.

From a service provider perspective, Lindquist has been actively involved in seminars and other consciousness-raising efforts to try to ensure that lower middle-market companies, which form such a key component of Lindquist’s client base, anticipate and address a changing market when making key exit-planning decisions. In addition, Lindquist has developed service offerings specifically designed to meet this emerging need. Financial advisers, accountants, business consultants, and other service providers are engaged in similar efforts, often in conjunction with attorneys, including ourselves.


Responding to Informationabout Landscape Change

Four “take-aways” are offered to those of you who will likely be selling or otherwise transferring a lower middle-market business in the next 10-15 years:

• Recognize the trends – and realize the value of trying to stay ahead of those trends as best you can.

• Measure – both where you are now and where you want to be. The latter includes clear identification of what your financial post-sale needs will be. For many business owners, those needs are much broader than maintaining a specific standard of living. Identifying and embracing those broader expectations is part of the measurement exercise. However, for many business owners, step one in the process will be understanding what net proceeds are required in order to maintain a minimum standard of living. The former includes obtaining a well-founded sense of how your business would likely be valued if it were to be sold right now. The combination of those measurements will help you with the next “take-away”.

• Plan – develop a path that gets you from point A, where you are right now, to point B, the point at which you are fully ready to exit your business in exchange for a price and terms that meet your exit planning needs. When formulating that plan, consider obtaining input from others who are experienced in the field on factors that influence buyer perception of value. Explore how to measure your progress toward meeting plan goals.

• Invest wisely – more often than not, your plan will include development of intangible assets (processes, information, people) to protect and enhance the value of your company. Again, the goal is to make your company fully transferable and otherwise attractive to prospective buyers. Make those investment decisions in the same way you would decide on capital expenditures or other tangible asset investments. The difference in exit value helps establish your ROI on those investments. What’s most critical, though, is that your plan gives yourself enough time for your investments to bear fruit.

Baby Boomers have had a very successful run. The end of the run might look different if we and later generations had procreated more. However, the results of demographic trends only impact the degree, not the existence, of Baby Boomer success. It behooves all of us, service providers included, to work in concert to take the steps needed during the next 10-15 years to secure sale prices for lower middle-market and middle market businesses that enable their owners to meet their post-business expectations of life.

© 2016 Lindquist & Vennum LLP


Take-Aways

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For more information on how the Baby Boomer tsunami will affect your business, and how to properly plan for a successful exit, contact Chris Cuneo at [email protected].

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