Called by at least one group of authors "The $10 Trillion Opportunity," a lot has been made of the deal activity expected to arise from baby boomers retiring or otherwise exiting from their businesses.
Estimates of how many privately held businesses could change hands, and of what kind of value they represent, vary. Data out this week from the U.S. Small Business Administration shows that nearly 52 percent of business owners are over age 50 -- a larger share of people nearing retirement age than in the employment population at large.
One market researcher estimates as many as 3.8 million firms could hit the market over the next 20 years. A recent survey by Pepperdine University found that 64 percent of business owners planned to transfer their ownership interests within the next decade.
Whatever the estimate, it's safe to say that many business owners will fail to capture the full value of their hard work through an ownership transfer. Business broker and website author Jim Stauder estimates some $3 trillion in value - or most of the opportunity for owners of small businesses (those with 49 or fewer employees) -- will be left on the table due to owners' failure to plan their business exits.
Other recent surveys also provide fresh evidence that owners are falling short when it comes to being prepared for a transition, including a possible sale.
PwC's latest U.S. Family Business Survey found that 73 percent of family businesses don't have documented succession plans in place. And financial advisors said less than 30 percent of their small business clients actually had a written succession plan, which would include plans to sell the business, according to a survey by CNBC and the Financial Planning Association.
Developing a plan for the sale or transfer of the business is only part of the challenge for baby boomers who own businesses. Many owners may also need to adjust their business models in order to be able to sell or transfer ownership at all.
Sageworks Chairman Brian Hamilton notes that many entrepreneurs, while highly skilled at creating products or generating revenue, have difficulty understanding financial statements and knowing what creates an economic profit for the business entity.
"Most buyers want to own something that will give them a greater return on their money than the other options available, so economic profit is important if you're trying to sell your business," he said.
Business owners should think about the value of their company now, before it's time to retire. Business owners can use knowledge about their company's valuation and financial performance to make better business decisions; equipped with this knowledge, business owners can make conversations with their accountants and other financial professionals more productive.
The good news is that privately held companies (which make up nearly all U.S. businesses) are doing well in recent years. They are growing sales and generating their strongest profitability in years, according to data from Sageworks.
How do you know if your own business is worth selling? The SBA recommends weighing several factors, including:
- Whether you have a strong history of profits.
- Whether your assets are in good condition, with significant market value and remaining useful life.
- Whether you have fresh inventory and good relationships with suppliers.
- Whether you have a healthy balance sheet, which includes good retained earnings and net worth, accounts receivable that are collectible and low levels of debt.
- Whether your business is dependent on a particular person's talents, making it difficult or impossible to transfer to another person.
Asking these questions can be the first steps in making a successful exit plan, allowing owners to capture the maximum value for their business.
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