In a 2005 study commissioned by the Canadian Federation of Independent Business) (CFIB), 71% of small and medium sized business owners expressed the intent to sell their business by 2015. (Figure 1).
71%!!!. This is a number that seems inexplicably high until you look at the demographics. As the “Baby Boom” generation approaches the age of retirement they will naturally be looking to sell their businesses. The challenge is not that so many businesses are or will be for sale, it is to whom they will be sold.
As is evidenced on the Demographic chart in Figure 2, the dynamic is not only the swell of population approaching retirement, but as important is the large population vacuum behind them. With an abundance of sellers and shortage of buyers, basic economics will tell you that prices will be depressed.
Whereas a few years ago small business may have sold for 3-5 times earnings, currently businesses are averaging 1-2 times earnings, and are more than likely going to drop further in the coming months and years as more and more owners position themselves to sell.
Falling business values have left many business owners in a conundrum. Their retirement plans were dependent on getting a good value for their business and investing the proceeds. Within the current and foreseeable future tax and investment environment, however, the return that Owners can expect to make off investing their sale proceeds is less than 20% of what they were earning annually from their business. With these conditions, many business owners simply cannot afford to sell.
The same CFIB study as mentioned earlier, reports that 2 thirds of businesses do not have a succession plan AT ALL, and of those, over 50% said it was due to either over complexity, lack of available advice or lack of time.
With so many Owners looking to sell, there is an implicit (if not explicit) competition at hand for the available buyers. Those with a proper and well thought out succession plan carry the edge in that competition. With a little foresight and planning, business owners can position themselves to not only mitigate the dynamic of falling business prices, but to prosper in the face of it.
It is my hope in this blog to discuss some of the opportunities and share ideas and strategies to help businesses succeed in the long term and transition this demographic chasm. Small and medium sized businesses make up over 90% of our goods and service producing economy in Canada…we cannot afford for them to fail or falter.