The number of businesses and the value of assets set to hit the market during the next ten years are mind-boggling.
With many business owners having 70% or more of their personal assets tied up in their businesses, the Baby Boom generation cannot afford to delay preparation for the sale of their businesses. There’s simply too much at stake.
In late 2012, CIBC World Markets published a report estimating that between 2012 and 2017 $1.9 trillion in business assets were poised to change hands and that by 2022 that number would explode to at least $3.7 trillion as 550,000 owners plan to exit their businesses. (1)
While it appears that the expected deluge of business sales has not taken place between 2012 and 2015, neither the companies nor the exit expectations have not gone away.
We are beginning to see more business owners in the 65+ age range ask the right questions about selling their businesses and some are moving forward. Others are not ready to move forward for a number of reasons including:
- Having still not recovered sufficiently from the last recession whereby their revenues and earnings can support their valuation expectations;
- Finding the weak Canadian dollar to be negatively impacting their business,
- Many are struggling with conflicting advice from multiple advisors;
- Many are not ready to fully face the challenges and put forth the necessary time and resources to implement a sale process;
- Some don’t view the current low interest rate environment as providing attractive investment returns on monies received from the sale of their businesses so they decide to just stay the course; and
- Some simply have valuation expectations that far exceed what rational buyers are willing to pay and will never sell their businesses.
I find the game of Musical Chairs to be an interesting analogy for understanding what will probably happen when many of the Baby Boomers finally decide to sell their businesses between now and 2029. As we all know, the first to sit in chairs win, all others lose and I’m guessing that it’s fair to surmise that there will be very few winners and a whole lot of losers.
Think of the “chair” as being the number one or two dominant industry players in any traditional business sector that have an appetite to consolidate the industry. The first to market or the most attractive find a seat (are acquired) at reasonable prices and everyone else is left standing. Power shifts to the buyers, acquisition prices decline, those left behind disappear. I know it sounds dramatic and apocalyptic, but that’s just how industry consolidation takes place.
What are the options available to a seller of a business?
- Private Equity firms will not be a viable exit for most of the companies: In 2014, there were a total of 296 deals completed by Private Equity firms for a total of $41.2 billion dollars with the top 10 transactions accounting for $26.8 billion or 65% of value.
- Going public by way of an initial public offering, RTO, or CPC is not viable for many of the companies for many reasons including: size of business, sector, lack of liquidity, lack of sizzle…
- Many traditional business owners are finding that their children do not have an interest in assuming or acquiring the family business.
- Purchase by employees is a rare exit option.
So we arrive at two viable options for most of the owners: sell their business to an arms-length third party or continue to operate the business and extract value through salaries, dividends, and asset sales as they run the business to the end of their life.
For many, the latter will be the only option as valuation expectations simply are not in line with the market and there will be no offers for the business or the offers that come will be rejected.
In terms of selling to an arms-length third party, maximum value will be realized by those individuals who are well prepared, have attractive businesses with predictable revenues and earnings, are willing to consider terms and conditions on a sale that may include a vendor take-back or earn-out, have realistic valuation expectations, and are not coming to market at the same time as many similar companies in their sector.
We are currently in a sellers’ market. Acquirers are looking to augment slow growth through acquisitions; interest rates are low, making debt financing attractive; and the weak Canadian dollar makes acquisitions attractive to US buyers.
If you’re thinking of selling your business over the next five years, now is a good time to start planning. If you would like to understand the process for preparing your business for sale and the options that are available to you, we’re always happy to have that discussion.
(1) CIBC World Markets Inc., In Focus, November 13, 2012, “Inadequate Business Succession Planning – A Growing Macroeconomic Risk”