Many numbers frame the realities of Baby Boomer retirement. Approximately 10,000 Boomers now reach retirement age on a daily basis. A Boomer born in 1955—the approximate midpoint of the generation—becomes Medicare-eligible in 2020. But there's another big number at play: 2.3 million.
The best deals will be available to those who know how to communicate the long-term value of their business.
Baby Boomers own 2.3 million businesses in the United States, according to an analysis of U.S. Census data by Project Equity, which finances employee cooperative buyouts of businesses owned by older Americans. These businesses combined account for nearly $1 trillion in payroll, but the organization reports that only about 15% of their owners have a succession plan.
The transition away from ownership and operation of these businesses is part of the tens of trillions of dollars in wealth being transferred from Boomers to younger generations. In a rate environment that remains near historical lows, private equity and strategic corporate buyers are bursting with capital, and strategic corporate buyers have access to funding at historically low rates, resulting in a sellers' market for middle-market companies at an opportune time.
Storytelling and Finding a Buyer
Boomers looking for a buyer need to be ready to do more than just open the books. The best deals will be available to those who know how to communicate the long-term value of their business. And the more closely intertwined their personal skills and experiences are with that business, the more a buyer will want to hear a convincing argument. “When a CEO/owner steps aside, it is not just a question of what the business is worth, but what the business is worth under a new management structure," says Bryan R. Routledge, Associate Professor of Finance at Tepper School of Business.
Although wealthy individuals and investor angel networks are potential buyers of privately-held companies, the majority of sales today are made to private equity firms. Routledge says that the substantial growth and evolution in private equity over the past 20 years has made it much easier to find takers in that market. “The fact that companies like Uber can raise a couple of hundred million also facilitates the movement of these companies. We know more about private equity transactions and structuring deals."
A Multi-Year Process
Although some owners can start monetizing their business quickly as they reduce a majority or significant minority stake in the company, fully exiting a complex business will take time.Owners looking to sell larger middle-market companies with more professional management and operational infrastructure should start considering their options 3 to 5 years in advance, advises Michael Hand, Managing Director at PNC Riverarch Capital, a private equity affiliate of the PNC Financial Services Group.
He notes that business owners often fail to address personal financial planning, tax and estate issues. “The people a business owner should be talking to well in advance of selling the business are his or her wealth planner, attorney, tax advisor, and investment banker," he says.
Why? “It’s not what you gross, but what you net,” says Joseph Fahey, CFA, CEPA, National Director for Business Succession Planning at PNC.
Plus, with investment yields declining over the past several years, it is crucial that you obtain a “financial snapshot” on a before and after basis. This includes what your financial statement, cash flow, liquidity, risk profile and asset protection may look like post transaction. Every situation has unique circumstances and there are countless pre-sale planning opportunities to consider.
Addressing Lingering Issues
Whether an owner is hoping to exit with a hand-picked successor in place or is simply trying to tie up loose ends for a clean break, lingering issues from environmental challenges to problematic customer relationships to legal disputes can impede a sale. “The longer you have to plan, the better the process is going to be," Routledge adds.
Owners must also consider that they may still be tied to the company for years after the sale.Many PE recapitalizations require the owner to retain skin in the game, usually in the form of a 10% equity share or subordinated notes of a few years in maturity with a performance-based payout.
With new and creative recapitalization finance available to business owners, a little leverage can go a long way. The right combination of junior and senior capital through a delicate leveraging of the company can often be a great first step to monetize the business prior to putting the plans for sale into action. Seeking lending relationships with deep experience in these structured capital situations can help make the final transaction a successful one.
Retiring entrepreneurs have options outside the private equity market.
If pride allows, they may consider selling to a competitor, who may find cheaper funding because they can package a deal with immediate synergies. But because these synergies often come in the form of significant layoffs or a change in branding, this option might be unappealing to an entrepreneur looking beyond the numbers.
Ultra-wealthy family organizations sometimes target like-minded entrepreneurs for buyout and are more likely to embrace an existing corporate and management structure. They are often drawn to consistent, steady income for dividend purposes. But these entities typically move at a slower pace, which could be an unwelcome drag on the exit process.
Entrepreneurs finding limited interest from private equity markets can also investigate selling to their employees and management. These deals can be arranged directly, through an employee stock ownership plan (ESOP), or to an employee cooperative. Some city governments as well as the Small Business Administration have programs making these structures more appealing and accessible.[4-5]
Wherever retirement takes today's Boomer entrepreneur, the capital markets are rich with opportunities, and flexible enough to help make an exit as distinctive as the business itself.
Ready to Help
Planning proactively, working with experienced advisors, and understanding the future needs of the company can make the transition from daily operation to financial freedom easier and more profitable. PNC offers deep experience in ESOPs and private equity transactions, wealth management and conventional lending. Contact your PNC Relationship Manager for more information.