Rochester Tooling & Machining Association

Education & Training




Attention Exiting Business Owners -There’s a Perfect Storm Approaching

Tom Agnello, M-One Advisors, LLC 

As the Baby Boomer Generation continues to exit their businesses and transition the ownership to family members, or outside concerns, it is estimated that over $10 Trillion of personal wealth will change hands. While many may know about this trend, a lesser known fact is that according to the US Census Bureau, 75% of all businesses (with more than 1 person on the payroll) or 4.4 million businesses are owned by people over 54 years old. Over 90% of these business owners have as much as 75% of their personal wealth tied up in the equity of their businesses. 


What are your prospects for transferring your businesses when you are ready? The need to liquidate ownership will impact all of us, young and old, as the boomers try to capture the wealth that they have created over their lifetime as a means to retire. But there is good reason to believe that there is going to be far less of it than you might expect. In fact, the elements of a perfect storm are brewing.


We are in the middle of a stock market bubble - despite the recent correction, a housing bubble - again, a dot-com bubble - again, rising interest rates – again, but never before have we seen a baby boomer business owner demographic bubble. This “age wave” is coming like a tsunami.


There is currently over $600 billion in funds available (“private equity overhang”) to acquire businesses — nowhere near the amount of equity needed to do even 10% of the transactions that will be up for sale over the remaining span of the baby boomers years left working. The stock pile of cash in the coffers of strategic buyers and investors, is about the same. Even if fresh investment capital becomes available, the amount of supply will drive values down significantly. 


There is a Market Transfer Cycle and every ten years there has been some kind of recession. It is currently a seller’s market but the bull has had a long run and it will get tired sometime this year, 2016, or next in 2017. It always does. When it does, it will become a buyer’s market of major proportion and only the strongest deals will get transacted. 


There are three major forces at work and together they are impacting the owner’s situation exponentially:  Many businesses for sale. In addition to those businesses owned by retiring baby boomers, where the estimates range above 7 million, there are over 8,700 companies in inventory that are currently owned by private equity firms that will become available. Furthermore, there are owners less than 65 years old who will be seeking capital for growth initiatives. There will be lots of competition for cash, for the retiring business owners and all of it will drive prices down.

 

There are not nearly enough funds to satisfy all the sellers looking to transact. Private equity fundraising won’t be able to keep up. Limited bank funding and rising interest rates will make buyers very selective and only the A++ companies deals that spew out cash will get done and even they will have reduced purchase price multiples.


 

The economy goes in cycles and there is only about another one to two years left to the current seller’s market. Can an owner really afford to wait it out until the market cycles back? It may take significantly longer than any time in the past.


What’s the result? Only the best deals — maybe top 10 to 20% — will get transacted. If owners miss this current cycle they will have to wait at least seven years until the market starts to turn in favor of doing deals again, all the while, the boomers are flooding the market with their companies up for sale.
 


So, if you are a RTMA member and business owner, with thoughts of selling anytime in the next two years, how do you achieve getting your company in the very best competitive position for a transaction?

 

CALL TO ACTION:


First: Establish a sense of urgency and a realistic view of the value of your business today. Look at it the way a buyer would. Remember the value for the buyer is based on what he can get out of it, how much cash can he generate and at what rate of return, not what you put into it. The RTMA Core Value Software Program is an excellent way to either do this yourself or hire a consultant to guide you through the program.
 


Second: The output of the Core Value Exercise will provide you with a road map on where to focus to increase value. This can be done without significant growth, dramatic improvement in earnings or even increasing your debt. Hitting the current seller’s market window means getting the business ready for a sale process in the next two years (it might take another year to find, negotiate, and close on an acceptable transaction).

Third: In addition to providing you with a road map, the Core Value output will help you and your executive team to create priorities for how you focus your efforts over the next 2-3 years. You’ve spent a lifetime working “in” the business, now it’s time to start working “on” the business. This isn’t like selling your house where you can get it market-ready in a month or so.


And finally, Fourth: Get some help from an expert. The storm is coming and riding it out without eroding value will be extremely difficult. The issues here are vast and complex so find a professional who has a portfolio of clients that have done precisely this. You can’t go it alone and expect a successful outcome. You haven’t done it thus far and so you probably are ill-equipped to do it in the future. After all, you still have a business to run and other demands on your time. The ROI on this kind of help is significant but there aren’t that many qualified advisors available in the Upstate New York market that can help you plan, execute and market a value enhancement strategy that will get you the cash value that you worked so hard in building.


As a Boomer, you have been a driver of economic growth and consumer spending even before the early eighties when you started to reach your peak earning years. This demographic group turbocharged rates of home ownership, consumer spending and, most important of all, employment. Almost everyone has either paid or benefited from the taxes they have generated.


Will your business ownership legacy be another boon or a victim of a perfect storm?


Tom Agnello is the CEO and President of M-One Advisors, LLC and a Partner with Madison One Clearinghouse Network. He has been a long time member of RTMA and is Certified as a Core Value Advisor, helping business owners looking to improve their business performance and value, before selling or transferring their business to the next generation of owners. Tom can be contacted at 585 978 9523 or agnellotn@gmail.com

 

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