1. The Numbers Don’t Lie
Why you should care about Baby Boomer demographics when thinking
about a successful future exit from your business
This document is attorney advertising and does not constitute legal advice.
2. Although this article is applicable to a broader population, it is written with a special eye toward Baby Boomer owners of lower
middle-market businesses. Why? First, because Baby Boomer business owners will be most affected by the demographics
of which they are a part. Second, because lower middle-market businesses historically represent a major share of all annual
business sales. Thus they’ll be the most affected by factors that alter supply and demand mechanics.
By definition, a Baby Boomer is someone born between 1946 and 1964. That’s more than 75,000,000 people in the U.S., more
than 26% of our total population. Baby Boomers became better educated than prior generations of Americans. Interestingly, the
percentage of Baby Boomers who attended or graduated from college is higher than the later generations, as well. Baby Boomers
are stereotyped as having optimistic, competitive, “can do” personalities. No doubt because of those characteristics, Baby
Boomers own a significant percentage of the privately-held businesses that operate in our country right now.
It’s extremely difficult to obtain precise, consistent information about how many “businesses” operate in this country, much less
how many of those businesses are owned by Baby Boomers and how many of those fall into the lower middle-market segment.
The SBA reports that there are over 28,000,000 small businesses in this country. A “small business,” for SBA reporting purposes,
is an entity with fewer than 500 employees. There are estimates that as many as 12,000,000 of those businesses are owned and
operated by Baby Boomers.
Many of those 12,000,000 businesses, though, are essentially sole proprietorships in which the business is the owner. The
more salient number for purposes of examining the effect of demographics on sales of private businesses is the number of small
businesses that employ others. In 2014, the SBA identified 5,707,941 U.S. businesses as falling into that category (large enough
to hire others but more than 500 others). There were 114,500 businesses in the State of Minnesota that had between 1 and 500
employees.
The most consistently repeated estimate is that approximately 4,000,000 of the businesses with employees in the United States
are owned by Baby Boomers. A few of those businesses fall into the SBA’s large business category. The vast majority, though, are
lower middle-market enterprises with annual revenues of anywhere from one to a hundred million dollars.
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Those
Wild and Crazy
Baby Boomers
3. Beginning in 2011, about 10,000 Baby Boomers in this country started turning 65 every day. That trend will continue to
be the case through 2029.
Baby Boomer demographics will have a big impact on our national and State workforces. In the current decade (2010-
2020), nearly as many people will turn 65 as in the prior four decades combined. The next decade (the 2020’s) will see
an even greater number of people reaching retirement age. As mentioned, that surge will end by 2029. However our
national and State economies will have undergone fundamental changes during the surge period.
One Baby Boomer demographic issue with which we’ll have to deal is its effect on the overall economy. A high rate of
retirements tends to result in slower “natural” work force growth, and lower work force growth rates historically translate
to slower economic growth. The ratio of workers to retirees in the State of Minnesota will reduce from 5:1 in 2010 to
4:1 in 2020 to 3:1 in 2030. By the 2020’s, Minnesota’s labor force growth rate is predicted to be at record-low levels.
Employers will be challenged to increase per-worker productivity or to source labor in other ways in order to maintain
vibrant State and national economies.
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The Effect of Baby Boomer
Demographics on the Economy
4. Within that potentially challenging economic climate, what do Baby Boomer
demographic trends likely mean in terms of sales of lower middle-market
businesses?
Some have estimated that 65%-75% of all “small businesses” in the U.S.,
of which the 4,000,000 Baby Boomer-owned companies with employees is a
subset, will put themselves up for sale during the next 10 years. The flood of
businesses being offered for sale in the next 10-15 years is impacted by the “not
the right time” decisions of business owners who may have otherwise sold their
businesses during the Recession or who are reluctant to sell during a time when
interest rates being paid on “safe” investment of business sale proceeds continue
at a low-water mark. Nevertheless, the desire to do something else--or health or
other considerations--will cause the trigger to be pulled in short order on the vast
majority of Baby Boomer-owned businesses. In fact, the pace may accelerate if the
flood of businesses becoming available for purchase has a predictable result on
purchase prices for those businesses.
The estimates on number of quality businesses coming onto the market supports
predictions that the next 15 years will entail the largest intergenerational transfer
of private businesses in the history of the world. Researchers have estimated that
more than $10 trillion in business assets may be transferred between the start of
the Baby Boomer exit era and 2025.
If the estimated 4,000,000 offerings of privately-held Baby Boomer businesses
were uniformly spread over a 15-year period, that would mean that about 267,000
Baby Boomer businesses will be changing hands every year. Comparison of up-
coming lower middle-market business sales activities to anything that we’re used
to seeing has proven impossible to accurately quantify. However, the overwhelming
consensus of those who have examined the issue is that we are at the front end of a
tsunami-effect increase in the number of businesses flooding the market.
The
Tsunami
of Baby
Boomer
Business
Sales
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5. Minneapolis Denver Sioux Falls lindquist.com
The supply and demand effect of the wave of businesses coming onto the market is obvious.
What isn’t as obvious is how dramatic the effect on business valuations, especially of well-
managed companies, will be. There remains an abundance of capital available to invest.
However the likelihood is low that everyone with a profitable business will enjoy the types of
EBITDA multiples currently being paid.
One thing that is known is that a decrease in valuation of a business owned by a Baby Boomer
is likely to have a dramatic effect on the net worth of the Baby Boomer’s net worth. A study of
owners of private businesses in the U.S. revealed that “about 75 percent of all private equity
in this country is owned by households for whom it constitutes at least half of their total net
worth. Furthermore, households with entrepreneurial equity invest on average more than
70 percent of their private holdings in a single private company.” (Moskowitz and Vissing-
Jorgensen)
In short, an unprecedented number of privately-held businesses representing the lion’s share of
the owner’s net worth will be coming onto the market during a confined period of time---and in
a setting where overall economic growth, and confidence in the economy, may be challenged.
That will cause buyers to become more acutely aware of differences between the choices
available to them. Those sellers who cannot demonstrate distinctiveness and transferability will
become marginalized.
Potential Effect on
Net Worths
of Baby Boomer
Business Owners
6. One potential response to statistical-based conclusions is to label them “bad science” and simply
embrace denial. Things have always worked out. Why shouldn’t they again? If you fall into this category,
read no more. There’s nothing that’s coming that will be of interest to you.
For those who recognize the inevitability of a landscape change, the challenge is to put that knowledge to
productive use.
One alternative, of course, is to give in to sheer panic. Regardless of what’s right for your life, rush out to
sell or liquidate your business before it’s too late. A panic reaction, though, is probably an indicator that
your business is not as ready for sale as it needs to be to meet your retirement needs.
For some Baby Boomers, accelerating the timing of sale of their businesses may be a prudent decision.
The values of their businesses may be at a high point and the cost associated with waiting to sell may
outweigh the personal reasons for not otherwise wanting to pull the trigger now. However, that decision
should be based on a reliable understanding of (a) what an owner requires in net proceeds of sale of
his/her business in order to meet defined expectations for the remainder of the owner’s life, (b) what the
business is worth right now, and (c) what, if anything, can be done to maintain or enhance that value if
this is not otherwise the right personal time to sell, or if current value doesn’t meet retirement needs.
Another alternative, after undertaking the type of audit described above, is to prudently invest in ensuring
that your business will be viewed by future buyers as distinctive and valuable even if there are a lot more
contestants in the beauty contest.
From a service provider perspective, Lindquist has been actively involved in seminars and other
consciousness-raising efforts to try to ensure that lower middle-market companies, which form such a
key component of Lindquist’s client base, anticipate and address a changing market when making key
exit-planning decisions. In addition, Lindquist has developed service offerings specifically designed
to meet this emerging need. Financial advisers, accountants, business consultants, and other service
providers are engaged in similar efforts, often in conjunction with attorneys, including ourselves.
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Responding to Information
about Landscape Change
