Even if you haven’t taken an economics course, you are most likely aware of the essential dynamics behind the laws of supply and demand. You probably see it in your industry and business all the time.
The M&A market sees it too. Fundamentally if there are more sellers than buyers in the market, there is excess supply, and valuations tend to drop and it takes much longer to close transactions (a buyer's market).
Conversely, if there are more active buyers than sellers at any given time, a “seller’s market” ignites. We are in one now – valuations tend to increase, and the time it takes to close transactions generally decreases (all other factors being equal).
That is why we are passionate about educating baby boomer business owners about one staggering fact:
“On the supply side, we have about 60 percent of the 15 million privately held businesses in the U.S. are owned by business owners born before 1964,” says Christopher Nicholas, Shields & Co., at ACG Boston’s DealSource Select.
If you are a baby boomer business owner, let that statistic sink in for a moment.
Sixty percent of 15 million is 9 million. Eventually all 9 million businesses will need to transition to new ownership as their baby boomer owners retire and move on. For the sake of our discussion, let’s assume that 50% of these 9 million either close the business, sell to their employees, or pass the company on to their children.
That leaves a staggering 4.5 million that will need to transition to new owners via an M&A event over the next 15 years or so. Again, keeping the math easy, that is roughly 300,000 that will need to find buyers per year.
So What’s the Issue?
How does that sound to you? Well, the key information you are lacking is the number of businesses sold annually now in the U.S. According to Dealogic, between 2007 and 2016 (ten years’ worth of data), 100,373 M&A deals were announced in the U.S., or about 10K annually.
Even if you are bad at math, that means over the next 15 years we will have a staggering increase in the number of baby boomer business owners in market looking for buyers AT THE SAME TIME, far surpassing the number of deals completed right now.
What will that do to the law of supply and demand for transactions? Drive down valuations overall and significantly increase the time it takes to find a buyer.
“Now, wait,” you say. “Hold on. Lots and lots of transactions occur in the U.S. every year that are never reported or documented.” This is true. It is estimated that at least 50% to 60% of transactions go unreported every year. So even if we factor that into the 100K announced in the last 10 years, it still means that the number of pending baby boomer transactions will swamp the market.
What does this mean to you as the owner of a business? Simply this: It is much better to move now and find a buyer than wait. It is estimated that far too many baby boomers will delay action until the latter stages of this 15-year time frame and that is when the real seller’s crunch will occur.
The good news is that Generational Equity is here to help. We hold highly educational exit planning conferences designed to help business owners learn how to beat this baby boomer selling tsunami. If you are interested in learning more, use the following links:
And no matter what you end up doing with your business, don’t get caught in the after-wash of this tidal wave of deal closings over the next 15 years!
By Carl Doerksen, Director of Corporate Development at Generational Equity.
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