More than 60 percent of U.S. business owners are more than 50 years old, and many of them are looking toward retirement. For some, this includes the process of attracting potential buyers, but the differences between the business landscapes of yesterday and today are stark, and many boomers face the problem of having built companies that won't attract a new generation of buyers. Three major trends impact the salability of a business. Understanding these trends can help owners transition successfully in a challenging market, and ultimately identify the buyer who will carry their company's torch going forward.
Understand the Work Ethic
Baby boomers are 2.5 times more likely to own a business than the generations before or following. Between 1975 and 1986, the formation of new businesses in America jumped from 300,000 to 700,000 annually. Faced with fierce competition on the pathway to success, many boomers chose to go into business for themselves. The result is that nearly two-thirds of all businesses with fewer than 500 employees are in the hands of people who are preparing to retire. Replacing such a massive portion of the population in the business sector is no easy feat.
Acknowledge Change
There are three major trends that challenge a small business owner preparing to exit. These three trends—demographic, psychographic and sociographic—are combining to change the landscape of independent business ownership.
- Demographically, the generation following the boomers (Gen X) is much smaller. From a supply-and-demand perspective, there simply aren't as many available buyers as the number of potential retirees seeking them.
- The psychographic profile of the buyer generation is unfavorable. What business owner hasn't complained about the work ethic of the younger generation? Raised in a 40-year period of economic growth, Generation X and successors, The Millennials, are more likely to choose family first, and perceive jobs and employers as merely the means to a personal end.
- They aren't wrong. The parents of the boomers understood the difference between work and personal life. One started when the other ended. In their drive for success, the baby boomers mixed the two and created the term "work/life balance." Younger generations are actually returning to an older set of values.
- Sociographic trends favor alternative careers over business ownership. Corporations are well aware of the issues and attitudes of the younger generations and have already made many adjustments. Telecommuting, sabbaticals, family leave and flex time are benefits designed to attract younger workers who have a different set of priorities. Few small businesses have the depth or breadth to allow skilled employees to come and go according to their individual priorities.
- Young entrepreneurs have little interest in the service-oriented brick-and-mortar companies that dominate small business. They seek a level of freedom that doesn't require being on call, schedules driven by customer convenience or a 55-hour workweek. Combined with the sheer lack of prospective buyers, a reduction in the number of small businesses becomes more than likely, it is inevitable.
Position for Success
Fortunately, with some planning and foresight, you can still beat the boomer bust and achieve your retirement objectives. There are two pathways to succeeding in a crowded sales marketplace. Build to sell—Your first option is to build a business that is attractive to younger buyers. It should allow for personal flexibility, but it can't require a huge down payment. These generations were raised in a "buy-now-pay-later" world, where they are carrying substantial debt from the day they graduate college and have little opportunity to amass liquidity. Your technology doesn't have to be cutting edge, but it needs to be current. Nothing turns off the tech-savvy young buyer faster than a company that is limping along on outdated software or even paper. Hire your buyer—The second option is to hire your buyer. The stereotypes of different generations aren't universal. Certainly we all know boomer slackers, as well as young people who are ambitious and hard-working. Lacking capital, many of those younger go-getters would like to own a business but have difficulty seeing how they can make it possible. Creating your own successor requires a commitment to planning and development, but the financial aspects are fairly simple. A few years of selling equity in small amounts can let your successor build a minority stake. Then he or she can obtain third-party financing for the balance of the purchase so you can maintain control through the process, and take the proceeds with you when you leave. Everything you do to reduce your business's dependence on your personal contributions and to make it easier for any successor to take over increases its value to any buyer. You can't change the factors that create the most competitive selling environment in history. Understanding what the future looks like, and realizing that your buyer is unlikely to be someone "just like me" is a critical first step in the process.
