Boomer business owners hold off on retirement

Why are so many prospective retirees holding on to their businesses?

The predicted glut of boomer-owned firms for sale has failed to materialise. Instead, many prospective retirees are holding on to their businesses.

Back in the third quarter of 2014, it looked as if the Australian small business sector was moving towards a kind of generational crisis. Never had so many small business owners wanted to sell up – or so the figures appeared to show.

Since mid-2012, the number of businesses advertised for sale was increasing rapidly, according to market researcher BizExchange. In June 2012, there were about 24,000 businesses for sale across Australia. Six months later, the figure was 30,000, and by the end of 2014, 41,200 businesses.

Here was proof positive, many thought, that baby boomers were heading for the exit doors en masse. The implication was obvious. An oversupply of boomer businesses for sale would create downward pressure on prices, forcing owners to sell for less – or, at worst, shut up shop if no suitor could be found.

Yet in the nine months to June this year, the statistics changed drastically; the number of businesses for sale had declined to 29,567. Nobody saw this coming.

"The big winners are businesses that sell something that repeatedly wears out..."

What exactly happened? The situation was confounding to both business brokers and social demographers. Popular wisdom holds that business owners are ageing and are meant to be selling up. In 2011, the median age of Australian business owners was 47; by 2019, the predicted median age will be 55, according to the Australian Bureau of Statistics (ABS). 

Making up for earlier losses

So maybe the boomers were not selling up at all, but staying on the job. The ABS wrote in March this year that the business exit rate had shrunk from 14 per cent in 2012-13 to 12.7 per cent in 2013–14. Around two-thirds of the businesses that were actively trading in Australia in June 2010 were still operating in June 2014.

It seems not everybody is in a hurry to leave the building.

Related: How will companies deal with the growing number of workers over 65?

“I don’t think the baby boomer business sales have come on yet – they’re hanging on for as long as possible,” says BizExchange director David Bird.

“During the global financial crisis, too many people lost their savings in their superannuation, and the prices they could get for their businesses declined dramatically. So they have stayed on in business to make up for the loss.”

This paints a picture of rapidly ageing men and women waiting for prices to dramatically increase just in time for their preferred retirement age. But things rarely work out so seamlessly.

Bird believes that baby boomers are simply not ready or even properly equipped to deal with exiting their businesses. Few have an exit strategy, which normally takes years of calculated provision. “For tax purposes, they try to retain as much of the cash in the business as they can, but selling requires the opposite – showing clearly that you are profitable,” he points out. 

Too many family businesses have “funny entries” in their books, whereas corporate buyers very much want to see “a clean profit and loss”, adds Bird.

More than one way to sell

Kerry Boulton, chief executive of Melbourne’s The Exit Strategy Group, believes boomers may have to look at methods other than a straight sale of their business.

One of the answers may be to revive the management and leveraged buyout approach popular in the 1980s and 1990s. Buyouts almost invariably come with vendor finance attached, allowing the buyer to hand over parts of the purchase price on completion of the contract, with the balance paid afterwards. 

“If your readiness to get out is high, then you’ll do a straight sale and get what you can,” says Boulton, “but if you’re ready and have time to look at alternatives, think about putting in an employee share plan. It might be that the business could be a private equity play. Look at a management buy-out as a viable way or think of some form of family succession. There are plenty of ways of getting out.” 

Related: Why ageing is the next frontier

Tony Arena, who runs Sydney-based BCI Business Brokers, rejects the notion that there are too many sellers. He says there are always more buyers than sellers and believes it’s a myth that there is a glut of baby boomer business owners trying to sell. “This is all about ‘market change’ not ‘retirement motivation’,” says Arena. 

Pat Camm, a consultant who specialises in marketing accountancy firms, agrees that there are enough buyers in his sector – but too often, he says, sellers have no idea how to sell. Technological change also has to be factored in to the equation. 

“By ignoring the shift to the cloud and social media, they [baby boomers] look like dinosaurs to generations X and Y,” says Camm.

“I suspect they will hang on for as long as they can, but at some point the business will lose its value.”

Meanwhile he is wringing his hands trying to get old-style accountancy firms to transform from tax return factories into responsive and dynamic organisations, with prospects worth buying into.

“There are plenty of people keen to buy good accountancy businesses; their chequebooks are open,” he says.

“But if you don’t plan to meet buyers’ expectations, you won’t get the best outcome.”

What sells?

If you own an insurance brokerage, a real estate agency or a gym, you could probably sell it at a decent price without too much trouble. If you have a cafe, restaurant, hardware business, video shop or general retail business, you might find the going much tougher, because these types of enterprises have too few barriers to entry or too much competition.

What might a good business fetch? A strong bricks-and-mortar business will sell for four to six times net profits, but a top-of-the-line online business – with similar profitability and fewer overheads – might attract 10 to 12 times net profits, says Tony Arena from BCI Business Brokers. That’s the same sort of yield metrics as the (very hot) Australian property market. 

BizExchange says 78 per cent of its businesses for sale in June 2015 have price-earnings ratios of below two.

Standing out in the online crowd

For online businesses to sell well, they have to be “100 per cent stickable”, with a level of service that differentiates them from the pack, says Arena. “Will you deliver in two days? Will you pay for postage and will you respond in their time, not US time?” 

Information businesses, such as directories and job sites, are strong online sellers, as are entertainment and gaming businesses, he adds.

In nearly all cases, whether online or traditional, a good track record is only half the job; a saleable business must demonstrate that its earnings are repeatable ad infinitum. Insurance brokerages and real estate agents who manage rental properties all enjoy repeatable premiums, as few clients bother to ever change these providers.

Repeat business is key

Adelaide-based Bevan Roberts, who runs Dale Wood Business Sales Consultancy, takes it further. Roberts’s big winners are the businesses that sell something that repeatedly wears out or needs replacement. Tyre and automotive businesses fall into this category. 

Repeat business is also an important criterion. If the client base has confidence in the service, it will continue paying month after month. “If they’re paying A$40 to A$60 a month for their security, they probably feel it’s bought at not a great cost,” says Roberts.

Colin Simkin, from Brisbane’s Exit Alliance consultancy, highlights retirement centres and childcare facilities as good sellers, as well as medical partnerships and companies offering online and internet training. 

One trend he sees is fewer people wanting to “marry” the business. They want a five-day-a-week job, not a seven-day slog.

“People want to have some sort of lifestyle,” says Simkin. “They don’t want the businesses they buy to be all-consuming.”

"I don't think boomer business sales have come on yet - they're hanging on for as long as possible." David Bird, BizExchange

Retirement blues

A lot of business owners are not very good at growing their own “redundancy” package. Most organisations advising boomer business owners say businesses need to be shaped up if owners want to ship out in style. Researchers at PricewaterhouseCoopers found that many business owners who delayed selling due to the global financial crisis did not have the capital or risk appetite to innovate or invest in their business. 

It seems that a good exit strategy is a rarity. The 2015 Commonwealth Bank Local Business Owner Report revealed that only 47 per cent of small business owners had an exit strategy, and 22 per cent were content to simply close their doors and walk away. As many as one in four business owners aged over 60 were planning to close their businesses at retirement.

Even if this was the likely scenario, about 60 per cent of owners were still actively reinvesting profits back into their businesses and half were working more than 50 hours a week. 

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November 2015
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