ELITE ADVISOR BEST PRACTICES
Are Your Boomer Business Owner Clients Cashing Out at the Right Time?
Roundtable discussion with Elite Advisor Report contributors Josh Patrick, Randy Fox and Guy Baker
By Josh Patrick, Randy Fox and Guy Baker
- Everyone who sells a company actually buys themselves out with their own money. So taking a deductible income for a few years and selling for a discounted value is a solid strategy.
- Fair market value is a myth. The only real value is what someone offers you for your business.
- Wealth advisors are going to have to be more aware of the cultural shift and the differences required to connect with (and serve) these new owners.
A recent New York Times story, Baby Boomers Ready to Sell Businesses to the Next Generation, has provoked a great deal of discussion among entrepreneurs, their families and their financial advisors. To help separate the myth from fact, we checked in with several of our regular contributors who live and breathe these issues every day with their clients.
ELITE ADVISOR REPORT: Gentlemen, what do you think is driving this trend? Is it really generational timing and a favorable economy? Is this helping multiples?
RANDY FOX: Part of the reason is just timing. Boomers are getting old and have to sell sooner or later. The recovery has probably helped, but many are aging out anyway.
GUY BAKER: This is a demographic trend that has been on the horizon for a long time. The boomers know they have to do something with their companies. They are smart to start the process now before it is too late. Everyone who sells a company actually buys themselves out with their own money. So taking a deductible income for a few years and selling for a discounted value is a solid strategy.
JOSH PATRICK: I’m not sure the question posed here is really true. According to Rob Slee (founder of MidasNation and expert author about middle market M&A), deal activity seems to follow a ten-year cycle in which the beginning of the decade is slow and activity keeps heating up until you get to the end, and then the process starts over again.
EAR:Does it really take six-plus years to shake out the excess inventory of businesses for sale?
Baker: This pent-up demand resulted from the value of companies declining after the 2008–09 crisis. It has taken six-plus years for companies to regain their lost value. Boomers are saying to themselves, “Get out now before it happens again.” The most obvious buyers are key employees, but they have no money. So the sale has to be manufactured.
Fox: There are lots of businesses to pick from since many wanted out when times were bad. Scarcity always raises prices, and the low-hanging-fruit bargains are gone or remain undesirable at any price.
Patrick: The real question is, “How many businesses are put up for sale that never actually sell?” I recently read that it was 30 percent. To me that seems way too low. I was looking through BizBuySell’s listings the other day, and I saw that the vast majority of the businesses for sale will never find a buyer. There was just nothing to buy. This is something that advisors can really work on with their business owner clients.
EAR: According to BizBuySell.com, there has been a surge in NextGen buyers who are women or ethnic minorities. Why do you think that is, and how is that going to affect wealth creation and wealth management?
Patrick: It’s no different than every other part of the economy. More women and minorities are lawyers, doctors and other professionals. Women, Asians and Hispanics are the new Jews. They’ve been discriminated against for years, and opening their own businesses is a great way to get rid of glass ceilings.
Fox: The demographic shift makes sense for many reasons, and women and minorities have many more economic opportunities and programs that incentivize business purchases through favorable financing, etc.
Baker: It is great to see the demographics changing. This change reflects more accurately the population of the USA. With more and more minorities and women rising into the ranks of leadership in their communities and businesses, it makes sense they would now become owners. From a wealth management perspective, it just means the advisors are going to have to be more aware of the cultural shift and the differences required to connect with (and serve) these new owners.
EAR: Will the record number of businesses for sale make this a buyer’s market? The Times article didn’t seem to address FMV.
Patrick: Fair market value is a myth. The only real value is what someone offers you for your business. The other issue is the way these sales are structured. Too many small-business sales are done with owner financing, which has an unfortunate history of never getting paid. It seems to me I’m not seeing any expansion in multiples that are getting paid for main street businesses.
Fox: It depends on what the circumstances of each sale are. I hate generalities.
Baker: Less than 5 percent of all businesses are sold to investors. Almost all businesses are transitioned to key employees, family members and, in some cases, strategic buyers. The growing number of businesses for sale will impact prices if there is an auction taking place between outside buyers and sellers. This is why understanding the inside sale is so important. It is highly probable the inside sale will net more money for the seller than an outside sale. They will have to be more flexible with the terms. But they will eventually put more in their pocket.
EAR: Is there anything else you’d like to share with our readers about buying or selling (or not selling) their businesses right now?
Patrick: Buying and selling a business is almost never a macroeconomic issue. It’s almost always a micro issue. Is there a good reason for someone to want to own your business? If you can’t answer that question with specifics and a resounding yes with facts behind you, then there’s a really good chance your business won’t sell.
Baker: There is NO such thing as new money. The seller is going to get paid what the buyer nets from the business over the term of the contract. This can be dramatically influenced if the advisor knows how to use the tax laws to garner a great benefit at a lower cost. Advisors who learn this will control the market, and their clients will be better off for it.
EAR: What else can advisors urge their clients to do if they really want to position their businesses for sale?
Patrick: If you really want to sell your business, there are two things you need to do:
- Make yourself operationally irrelevant in your business, and
- Have a business with a great recurring revenue stream.
If you do those two things you’ll find lots of good buyers for your business no matter what’s going on in the general economy.