Recession and Boomer Progression:
The Perfect Storm for Entrepreneurs on the Brink of Selling Off
by Deborah Douglas
The past year has been a splash of cold water for business owners and advisors forced to consider the maximization of their aggregate net wealth. Value preservation concerns are understandably high, especially for the massive swath of Baby Boomer Entrepreneurs who are nearing an age when divestiture is a pasture looking much greener than it did ten years ago.
To pull…or not to pull…the trigger?
Owners who may have described themselves as “fairly close” to consideration of exiting their business a few years ago, must now start worrying that if they don’t act sooner, they’ll have to wait far longer than they intended. Numerous sellers who were close to sale one to two years ago have waited primarily because a) their earnings were dropping – and they know you can’t sell a business for maximum price when earnings are off, b) they’re worried about lack of velocity of corporate buyers, due to lagging performance and thus greater need for caution to keep shareholders comfortable, and.or c) they heard about lack of credit, and worried about the impact that such tightening might have on buyers in the M&A marketplace.
All of these were legitimate concerns and good reasons for delay, then. However, as the market begins to open up a bit with perked up earnings streams and new credit alternatives, the extreme slow-down of the past two years probably will cause a burst of seller availability, and a far less seller-advantaged supply-and-demand mix in the marketplace than any we have experienced in the past 20 years. In short, the time to begin the process of selling, and beating the stampede to the marketplace, is right now.
The writing is on the wall ... right next to all the numbers.
John Lewonetti, managing director of Pinnacle Equity Solutions, told the Boomer Market Advisor two years ago that the number of retiring business owners is expected to grow from 50,000 to 750,000 by 2009. That’s a 15 fold increase stemming from raw demographic numbers of Boomers that are likely to retire. Neil Shroff, managing Director for Orion Capital Group, conducted a survey in November of 2008 that validated this analysis with the finding that nearly half of business owners 55 years and older stated that they wanted to sell their businesses within the next three years. Additionally, the Exit Planning Institute says that over the next 15 years, eight million business owners are expected to exit their companies. All of this points to an enormous surge in business sale activity to come, and likely, new market dynamics that may have impact on owners wishing to sell over the next decade.
With a substantive surge in available sellers on the market, buyers can and will be more selective; probably buying at lower price points. Therefore, owners who are toying with the idea of selling within the next 5 years may find a significant advantage to moving earlier instead of later.
Some may argue that this is simply not an alternative due to depressed earnings; and in some cases this is true. Lower profitability of course means lower multiples. However, capital gains taxes are likely to increase over the coming years, so some loss from selling at a weaker moment, might be recouped by lower taxation for those who move now.
For those owners operating profitably today, acceleration of potential timeframes for sale would reap enormous benefit. Great competition creates great selling prices, and professional seller representatives, poised to move quickly with manpower and intensity of effort, can mean tremendous success, in as small as a 6 month window, for finding reaching the “right” buyers.
What’s needed is courage and honest evaluation. And in a few key indices, entrepreneurs and prospective sellers can begin to assess their potential to make “fast moves” in the M&A marketplace:
- Earnings Sheet - Good earnings histories mean good multiples likely upon sale. Companies generating cash flows in the double digits, as a percentage of revenues, are hot stuff. Last year, companies with even 5% cash flow as a percentage of sales looked quite good. For the manufacturing company, strong pricing might range between 4.5 and 6 x cash flow. For the service company, pricing would typically be a little less – maybe averaging 3.5 to 5 times earnings. Larger companies generally command larger multiples, and smaller ones it more modest multiples. However, for any company, if the competition is tapped effectively, and the company is desirable, all such rules of thumb for pricing may fall quickly by the wayside, in favor of pure market-driven competitive pricing.
- Asset Base - Companies with both a decent earning history, and a reasonably strong asset base, are today far more easily financed by prospective buyers. In recent times of financial caution, the “belt and suspenders” security of both cash flow capability and the back-up of solid asset base can make a tremendous difference in ready marketability and value.
- Staff Beyond Principals – Businesses that have developed second tier staff that is able to run the company without intense owner oversight are far more valuable in the marketplace. Owners can begin to identify these attributes by honestly answering a few simple questions: Can the main executives (owner included) manage to take multiple week vacation trips while leaving the company under staff supervision? Are there only a handful of highly paid executives, without any other significant leadership roles in the company? Lack of critical owner dependency is a major sign of strong value, and conversely, a red flag for weaker value.
Business owners often wonder how they can identify the ideal time for their company to be truly ripe for sale. If they miss it, they miss the once-in-a-lifetime opportunity to create the consummate finale to decades of grueling hard work. Most owners have one chance—only one chance—to optimally cash in on that ripe moment. Perhaps the time to start honestly considering it is now, when owners have the option to sell on their own terms, instead of later, when decline forces their terms off the table.
Deborah Douglas is managing director of Douglas Group, one of the country’s most successful middle-market investment banking firms. Douglas Group has successfully sold middle market companies for 17 years, achieving a staggering 95% success rate. With client-initiated bonuses of up to $4.5 million on a single transaction, Douglas Group has had phenomenal success.
Douglas began her career as an audit partner with Deloitte Touche, a major international CPA firm, where she became one of the first female partners in the firm’s history. She served as President of the National Accounting Association and Chairman of the Missouri State Board of Accountancy, and served on the Missouri Society of CPA’s Executive Committee. Ms. Douglas later headed that firm’s Midwest Merger and Acquisition Group. She has been published in more than 25 trade and industry publications, and is a frequent keynote speaker at major industry events.
Ms. Douglas is active in a wide range of civic and charitable activities. She recently served as Chair of the Girl Scout Council of Greater St. Louis- the nation’s largest Girl Scout Council. She has also served in leadership capacities for the Alzheimer’s Association, the U.S. Senate Business Advisory Board, the Missouri Women’s Forum, the CPA/Law Forum and Leadership St. Louis.
