How many times have you read about the huge amount of wealth tied up in baby boomer-owned small businesses that will transition in the next few years? And by transition, I mean they will be sold or gifted in the next few years. I must have read such articles a hundred times and you may have too. The reason for all the hype is demographics. As the baby boomers reach the end of their working lives, they will have to sell or gift their businesses to a group of younger entrepreneurs, thus a huge shift of wealth between generations.
There are whole industries that have been built up to help facilitate this shift of wealth. The problem is this: It isn’t going to happen. Of this, I am sure. There will be some shifting of wealth as we go through this huge demographic bulge, but it will be a fraction of all the wealth tied up in baby boomer-owned businesses. Maybe 25 to 50 percent of the wealth will transition.
I base my prediction on my observations while helping clients buy and sell businesses, especially my recent experience helping clients find a business to buy. Most of these small businesses owned by boomers are never going to sell or transition to another owner. They are going to be shut down and be liquidated.
Why will these businesses never transition? There are a lot of reasons, so I’ll mention the main ones I have observed in the marketplace.
The number one reason is that 90 percent of these businesses are overpriced or not priced at all. In either case, the owner of the business thinks their business is worth more than it is. Anybody looking at these businesses that objectively values the business, will not pay what the owner wants. The value is typically two to five times what the business is worth, so it’s not like a small overstatement that can be negotiated.
The next big reason, and related to the first reason, is the financial information that is provided is terrible and often intentionally misleading. Often this information includes an unrealistic calculation of EBITDA, particularly in ‘addbacks’ or adjustments to net income that are completely unrealistic. When I see the word ‘recast’ on financial statements, I read that as ‘falsified.’ Most small to medium-sized businesses should be able to pay for themselves through cash flow in three to five years. Usually, once I can do a realistic multiple, it is ten years or more.
Owner dependence is another common problem. Either because of the owner’s duties in the business or sales that are dependent on personal relationships, no one new can easily step into the owner’s shoes on Day 1. That’s a non-starter for a buyer.
The next reason these businesses are never going to sell is that they have some specific problems with the product or service offering that no one is going to overcome. Many of these boomer-owned businesses are legacy businesses that no younger person is interested in or in an industry that is slowly dying. Would you buy a newspaper?
I hate to say this, but another factor is that most young people these days (lord, I sound old) don’t want to work as hard as a business owner typically must work. They don’t want 60-to-70-hour weeks and have a deed of trust on their home for the business’s line of credit.
For these reasons and so many more, most of these businesses will never sell to anyone. If the business is listed with a broker or one of the big listing websites as for sale, it is almost the kiss of death.
What becomes of all that wealth on the personal balance sheets of boomers? It is simply dissipated, it disappears. I predict that is what is going to happen in the majority of these businesses.
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