The great baby boomer sell-off is coming

A baby boomer tsunami is coming and it’s threatening business owners relying on a sale, merger, managing director succession or any other succession plan in the next few years.

Consider the scale of this tsunami as estimated by Matthews Steer Chartered Accountants: 70 per cent of people running small businesses are expected to exit over the next 10 years. That’s more than two-thirds of Australian small and medium businesses in a single decade.

Approximately 80 per cent of Australian businesses are owned by baby boomers, who tend to have most of their assets tied up in their business. As more baby boomers enter their 60s and 70s over the coming decade they may need to sell the businesses to unlock funds for retirement – creating a metaphorical baby boomer tsunami.

As the market becomes awash with businesses available for sale there will be those that won’t attract buyers or achieve fair value. It’s a huge worry for businesses, particularly those that are run by families who have dedicated their lives to a business, worked hard and taken risks, yet may end up with little reward.

The problem is most businesses are unprepared strategically or structurally for a happy ending. According to an InformationWeek survey from 2010 only 10 per cent of businesses consider themselves either ‘prepared’ or ‘well-prepared’ for a sale.

I see too many small and medium businesses that would not make it through due diligence. Few appear to have any exit or succession strategy whatsoever and fewer still have a realistic idea of an appropriate level of investment and liquid assets necessary to fund their retirement. Many are not emotionally ready to let go and may have successors who are not emotionally ready to take over. All of these issues need to be addressed.

A good start for business owners who deserve the true value of their hard work is to ask four key questions:

What is our ideal succession?

Every business is different. An outright sale may be the best step for some but for others it could be a merger, a sale of a significant equity interest, a handover to a new managing director or passing it over to the family’s next generation. You need a clear strategy in place and may need to clear some emotional hurdles before a plan is implemented.

Is our business at risk of being undervalued?

Most businesses over-estimate their value, even when they might be unsellable, because only they understand the hard work and emotion that has gone into creating it. But with professional help it is possible to reduce this risk and turn it around, so that investors or other partners can also recognise its full value.

Would we pass the due diligence and legal process?

It’s heartbreaking to think that a business sale could fail at the due diligence stage, but a business that does not have its financial and legal affairs in order will often fall at this hurdle, devaluing the business. Those that are prepared and have sought the appropriate advice will go into the process knowing that these hurdles can be cleared.

Where will our buyers come from?

How will you find the right buyer or merger partner? Being connected to the right people is essential for a dream result.

Ken Matthews is a founding partner and Director of Matthews Steer Chartered Accountants and is an accredited Family Business Australia adviser.