It has been estimated that in the next five years or so, more than $5 trillion in value of small businesses will be changing hands. In the next 10 to 15 years, the estimate rises to $14 trillion. The main reason driving this is, of course, the aging of the Baby Boomer population in the United States.
Replacing the Aging Workforce
It’s not just business owners who are going to feel a Baby Boomer effect. Employers at businesses, not-for-profit organizations and government agencies must plan to replace a large percentage of employees who are approaching retirement — including managers and skilled workers.
The demographics of the aging workforce are illustrated in the chart below, which was released by the Bureau of Labor Statistics.
For example, in 1990, only 2.3 percent of the workforce was age 65 to 74. By the year 2020, it is projected that 6.1 percent of the workforce will be that age. Note: These are only people still working and does not reflect those who retired. Recent studies show that nearly half of 65-year-old Boomers have already fully retired.
As the Boomers hit their mid-sixties and beyond, they will begin retiring in droves. Many will want to transfer their businesses to family members while others will want to sell and use the funds to finance their retirement years.
The owners of those businesses want to maximize their value (if they are going to sell) or find the most cost efficient method of transferring the entities to their heirs. Either way, the value of a business being transferred is an important element for the owners to consider.
The recession that began in 2008, and the continuing malaise felt in some parts of the country, have certainly acted to reduce the value of many of these businesses. The lingering effects might also act to reduce values in the long-term. Additionally, the effect on the value of small companies when trillions of dollars worth of businesses hit the market in the next five to fifteen years is unknown.
One could speculate, as in other situations, supply will exceed demand and drive values even lower. The sheer number of businesses for sale and a diminished number of buyers could certainly lead to this conclusion.
Given both the state of the economy and the eventual flood to the market from the Baby Boomer Effect, here are five steps for business owners to consider:
1. Monitor your business value on a regular basis, probably annually. It is also important for business owners to manage their operations for value. That means instituting management programs and taking actions that will maximize the business value.
2. Even if the business is going to be gifted to the next generation, it’s important to maintain and increase the value so that the children and grandchildren inherit a strong operation they can improve upon further. With proper planning, a business can transfer the ownership to the next generation in a tax effective manner. Your CPA tax and valuation professionals can help to attain the best results.
3. When gifting interests to heirs, carefully consider the manner in which you are doing so. For example, if you have more than one child involved in the business, you need to be clear about the responsibilities each active individual will play when the next generation begins to run the operations. It is also responsible to clearly delineate which person ultimately is in control (and back it up with ownership and/or agreements). The last thing you want is a family deadlock somewhere in the future.
4. If you have some children active in the business and others who are not involved, it is wise to consider giving ownership in the business only to those active and taking care of the non-active children with other assets from your estate. If that is not possible, then you should consider devising some arrangement that will insure that the actively involved children are not hamstrung in operating the business and the non-active children will not be shut out of the benefits of future earnings of the business.
5. If you are planning to sell your business, put together the right team to help you. To be effective, it truly does take a team, made up of key members of your management, legal counsel, your CPA, and valuation analyst, and possibly a financial adviser if one is already in place. Some sellers also include family members, friends, and/or business associates to insure that they receive trustworthy advice. However, a note of caution on these latter potential team members. They can sometimes be detrimental to the process, if for example, they are given too much authority relative to their experience and competency.
There is no doubt that the Baby Boomer effect exists and it could have an impact on the exit strategy from your business. Your CPA, attorney and Valuation Analyst can be helpful in guiding you through this important transition not only in your business — but in your life.