According to the U.S. Census Bureau, there were 27.9 million small businesses (under 500 employees), making up 99.7% of U.S. employer firms in 2010. These small businesses account for 67% of net new jobs created between 1993 and 2011 and represent 49.2% of private-sector employment. The overwhelming majority of these companies are sole proprietors or “mom and pop” organizations. An International Data Corporation report reveals that approximately 2 million businesses in the U.S. generate between $1 million to $100 million in annual revenues, with 90% falling below $5 million.
The Quiet Strength of Small Businesses
These “small company” statistics don’t get much attention against the backdrop of the S&P 500 or the Dow Jones Industrial Average (DJIA). Daily stock market recaps focus on just 30 large companies, masking the critical role that small businesses play in our economy. Small and middle-market business ownership is a noble profession. Owners and their executive leadership teams enhance human welfare by creating jobs, unlocking potential, innovating markets, paying taxes, and expanding the economy.
The Impending Wave of Baby Boomer Business Exits
According to the Bureau of Labor Statistics, about a third of businesses survive 10 years or more. Many of today’s 10+ year-old small businesses are owned by baby boomers—now aged 51 to 69—who are seeking to monetize their years of investment. While boomers control approximately 80% of the U.S. personal financial assets, much of their wealth is locked inside their businesses.
In our experience, baby boomers aim to achieve financial freedom by exiting their business on their terms. Early success or recent growth, however, does not always equate to exit value. Value can be obscured by over-reliance on the business owner and issues such as lack of corporate governance, customer diversification, strategic planning, and organizational culture. Growth often brings challenges such as reduced cash flow, customer concentration, decreased accountability, and a rise in quality assurance issues.
Why Exit Planning is More Important Than Ever
By 2030, it’s projected that 1 in 5 Americans will be over 65, with an average life expectancy of an additional 17 years. This means that many retiring boomers will need to fund nearly two decades of expenses. As lifespans increase, so do living costs, putting further strain on Social Security and Medicare. The urgency of advance planning for business exit has never been greater.
The Impact of the Baby Boomer Sell-Off on the Market
The sale of a business is typically the largest payday for a business owner. With an aging boomer population, financial markets on the rise, and cash available, there will likely be a significant spike in small business sales over the next decade. Companies seeking rapid growth in a tight economy will look to acquisitions to expand channels, increase value propositions, and gain market share.
The influx of businesses for sale will likely create a buyer’s market. Boomers who have proactively planned their exits, built transferable value, and reduced reliance on themselves will have the advantage. Those who haven’t planned effectively risk becoming further commoditized, with fewer options besides a liquidation—planned or unplanned.
The Road to a Successful Exit
As Benjamin Franklin said, “Nothing is certain except death and taxes.” He might have added that all business owners will eventually exit their businesses. In these opportunistic times, don’t let an unplanned liquidation or other unforeseen events dictate your exit. Planning your exit strategically ensures financial freedom, creates a sustainable business legacy, and allows you to leave on your own terms.
To learn more about achieving financial freedom, building a business legacy, and planning your exit, contact us at info@flvcp.com.
