Various exit planning forecasts predicted that between 4.5 to 17 million small businesses would hit the market for sale in 2012-2018 period — thanks to baby boomers approaching retirement and taking steps to sell their business before the next downturn in the economic cycle. The 2013-2015 period was projected to be the peak of the baby boomer selling boom.
But business for sale listings (mostly “Main Street” and often with less than $500,000 annual revenues) on the major transaction sites, as well as the middle market business brokerage firm listings are down in almost every Northeast state we track compared to five years ago.
So where are all the sellers?
Our conclusion is that many of the basic market assumptions of the exit planning industry are wrong.
Not all small businesses are big enough to be crucial to fund retirement. US Census Bureau and SBA statistics for small businesses note that 85% have less than nine employees and 95% of such companies have four or less employees. Of these businesses, 53% had less than $500,000 in annual revenues with 28% reporting less than $100,000.
These asset thin businesses are frequently service related or retail business models which generate possibly $60,000-$100,000 in adjusted owners’ earnings. Such businesses generally sell not at the listing ad earnings multiple but in a range of 1.5-2 X adjusted owners’ earnings — which after payment of commissions, closing costs, and other obligations leaves little for retirement.
For entities with over $2 million in annual revenues, and certainly for those with over $4 million in annual revenues, the business sale is a central component to retirement planning and sophisticated planning is required. But for probably 95% of all small businesses in the United States this is not the case. Estimates of the small business population in the United States vary, but a mid range of 28 million small businesses probably yields a total available exit planning market potential of 1,500,000 businesses, which after adjustments for normal attrition may yield 500,000-600,000 businesses which are prospects for formal exit planning. We estimate that many professional exit planners have apparently greatly overstated the quantity of businesses which will be sold for retirement purposes by a factor of 9 to 15 times.
Most small businesses generate cash flow for an owner and his or her family for some period of years and then quietly close. In other cases, the owner creates an internal solution such as a sale to an employee or family member.
Such businesses unfortunately have little value as a store of wealth and a platform for a financially stable retirement. They often provide livable compensation for the owner and a handful of employees for just a few years: the SBA reports that only one-third of small business formations exist after ten years. Exit planners seem to overlook this fact and assume that all existing businesses will transition into the retirement age of the owner.
Other thriving business owners are postponing selling their business to take advantage of possibly the last two to three years of growth in their local economy and business. Many small business owners suffered through the recession in 2008-2010 and want to harvest a few more good years. They will sell — but it will likely be at the wrong time and for a depressed valuation.
The traditional retirement period is also being pushed out as people live longer. The prospect of retirement is less and less attractive to many owners, who are still vibrant and capable of running their companies.
We predict that there will be approximately one-half million small businesses with sophisticated exit planning needs over the next five to ten years which might be marketed for sale — many fewer than the widely projected 4.5 to 17 million that would be marketed for sale and not substantially higher from historical listing levels.
We also believe that there will not be a major imbalance between sellers and buyers. The historical assumption of one buyer for one seller is dead as a new pattern of consolidators and investors has emerged who acquire 2-10 (or more) businesses.
The exit planning industry is correct that a multi-disciplined strategy is needed to evaluate, select, and execute a strategy to sell a small business, especially if the revenues are $2 million or more. We recommend that business owners looking to sell obtain an independent third-party business valuation. Inflated valuations add time to the process and put the seller at a disadvantage, especially if marketing the business in a declining valuation market.