Baby Boomer Impact on Mergers & Acquisitions
Baby Boomers, that generation born between 1946 and 1964, represent the largest segment of the United States population with a size of roughly 78 million. Recent studies indicate a couple of trends with regard to this segment.
10,000 Retiring Each Day
First, “Boomers” are starting to retire in droves. Recent studies indicate the rate will be steady at about 10,000 per day for the next 19 years, but the rate may actually accelerate as some boomers move on to retirement earlier than previously anticipated.
7 Million Businesses are Owned by Boomers
Secondly, an estimated 9% of boomers with annual income in excess of $50K/year own businesses. The numbers are astounding: an estimated 7 million businesses in the United States are owned by Boomers. Of those in this category is it estimated (according to the Family Firm Institute) that 33% will successfully transfer their companies to the succeeding generation. For the remaining 67% or so, generation X & Y have checked the “opt-out” box on taking the company reigns for another 30 years.
Boomers, it’s time to sell
For those without a transition plan, the time to begin was yesterday. These decisions will shape the health and future of the business and the robustness of your retirement account. When it does come time to sell, the longer you wait, the more limited your options will become. In general, here are a few of the potential options for business owners without a succession plan or with someone to take over the company.
- Continue to run the business. Instead of retiring, you could treat the business like Warren Buffett, working with no intention of retiring and eventually leaving the business to estate settlement proceedings.
- Complete business dissolution. If no competent leadership or transition owner, group or plan comes to the forefront a complete dissolving of the business and sale of the assets may be the only option to take.
- Sell the company. Having a liquidity event will most likely create a nice retirement buffer and more stability for any potential heirs of your estate.
An uncertain future and the financial burden of parents, children and themselves makes option #3 above the most ideal for any retiring Baby Boomer without a particular plan for exit. Sell, sell, sell. The time to sell may not be today, but the time to prepare by speaking with an consultant is certainly now.
8 Million Business Sales in a Decade
The Exit Planning Institute projects more than 8 million private businesses in the United States will be sold or exited in the next 12 to 15 years. This could be compared to a literal Tsunami of of assets flooding the market many which will be driven by the retirement and transition from retiring Boomers.
Supply/demand economics should alert entrepreneurs of the impending reduction in prices. Such a change in private business economics will also tip the balance of power to potential buying managers and investors. Standing out of a crowd of businesses in a Baby Boomer-saturated business market will become more and more difficult.
Planning Ahead
Being prepared to sell your company is a process, not an event. It first starts with an expert business valuation and then an execution of the entire business sale process. With an expert valuation in hand, you’ll better be prepared when the timing is right. Timing is everything when it comes to selling your business.
Impact of Entitlements on M&A
Because much of what we do is focused around the middle market and our own skin, we often fail to miss larger broad market effects when and the impact they will yet have on the world. I like to consider myself bullish on the U.S. of A. long term, but when I read doomsday reports on entitlements from constant doomsdayers like ZeroHedge, it makes me a bit more reticent to jump on that bull and ride with vigor. There are positive things occurring as the boomers advance in years, but unfortunately, the negatives that are in our future stand blaring us in the face, the proverbial and unavoidable train wreck or the elephant in the room.
The upside is this: 10,000 baby boomers are expected to retire each day for the next 19 years. The downside: 10,000 baby boomers are retiring daily. On the positive side of the equation we see approximately 300K baby boomers making their exit from the workforce monthly. This astounding number of eventual retirees caries with it one of the largest transfers of wealth in the history of mankind. Many of these individuals own and manage successful middle market businesses with plenty of profits to go around. In other words, those who have prepared themselves for the coming shift in assets and wealth will prove extremely helpful at transitioning between the generations. However, there are so many other cogs in the scenario which need addressed it’s frightening.
Take for instance the fact that most boomers have less than $50,000 saved for their retirements. This means the majority of people will be highly dependent on Uncle Sam to fund their retirement. The difficult piece of this puzzle is the explosion of entitlement spending that is about to take place, something completely correlated with the mass exodus from the job market. Here are some additional alarming statistics put together by the Congressional Budget Office:
- Without entitlement reform federal spending will exceed 40% of the economy by 2050
- Deficit spending for entitlements, including Medicare and Medicaid began in 2010. It only gets worse as the backlog of retirees begins
- Medicare is currently the biggest vacuum for federal spending and its growing at an alarming rate
- Without intervention by 2045, tax revenues will be fully eclipsed by Medicare and Medicaid alone
- Entitle spending is expected to double by 2050
- Tax increases on the wealthy will not solve the issue
- Tax rates on all Americans will need to double in order to simply cover the expected costs of the debacle
What does this mean for the investment banking industry? My prediction is that the middle market multiples will be even more suppressed than we have seen them previously. Valuations of middle market companies will be much lower than their larger S&P traded counterparts due in part to customers’ willingness or ability to pay. Higher expected taxes reduces the excess cash on hand for small firms to reinvest and expand their business via acquisition. Sellers will be more likely to sell at discounts to ensure that at least they are able to get something out of their baby and have at least a semi-comfortable retirement. Deal terms could most likely favor strategic buyers even more, especially if they have money. Individual buyers will probably also gain a little more negotiating power than they have had in the past as well.
Baby Boomer Impact on Mergers and Acquisitions
Of those 10K boomers retiring, it is estimated that roughly 7% of them have ownership in businesses and business assets of some kind. If the following statement holds true…
You build wealth by focus, you preserve it by diversification.
…then a great deal of the assets of the boomers will be up for sale in the next couple of decades. That could mean more than just the businesses. It could mean everything from oversized automobiles to home downsizing. Many will scale back as they transition from working years into “golden” years. The baby boomer impact on M&A will be substantial. Many businesses owners who’re nearing retirement will want to take some–if not all–of the chips off the table and diversify in some type of fund–mutual or otherwise. In fact, the Exit Planning Institute estimates that somewhere around 8 million businesses will be sold in the next 12 to 15 years, due in large measure to the baby boomers heading into retirement. Here are a few fascinating statistics surrounding the retiring baby boomers thanks to Pepperdine and Inc. Magazine:
- Roughly 10 million (or 65% to 75%) of all small companies will be up for sale in the next 10 years
- $5 trillion is the number given by some specialists who see the impending wealth transfer as the baby boomers retire and shift their business assets into liquid assets
- Roughly 40% of family-owned companies in the U.S. will experience leadership change in the next five years
- Just over 55% of middle-income households have saved less $100K for retirement. About 20% have saved less than $10K
The data is a bit disheartening, but also revealing. The macroeconomic changes that are shortly coming could have an impact on the supply/demand equation in a big way. While we’re currently seeing a seller’s market for M&A, this could quickly shift as the glut in supply (partially brought-on by the recession, partially by the economics we’ve been discussing) combines with potentially softer demand, but it may remain to be seen. We’ll see.
There will certainly be pain among many retiring baby boomers, but also some great wins for those who’ve prepared and built businesses that will eventually come with a significant payday. Selling a business is more than just the liquidity event, but it can often mean protecting the legacy you may have worked a lifetime to build.
Parting Thoughts
We’ll most likely also see a shift in the way businesses are perceived as well, which could further impact valuations and most likely in a negative way. With the uncertainties looming large in the not-to-distant future, the options seem bleak at least for some. We can be confident and highly bullish of the fact that there are still businesses that need to be sold and the coming years will see a huge shift in the volume and need for such services.
Strategically navigating an uncertain future in a market as soft as that of recent vintage will require input from multiple sources, including attorneys, M&A experts and business consultants. Post liquidity event, retirement planners will also help to provide the needed resources to maximize ROI of your personal wealth portfolio. While the impending flush of similar businesses should make you ready to prepare the company for sale, you should never rush the sales process. Maximize without selling yourself short.
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