Baby Boomers and their Businesses – Implications for Mergers & Acquisitions in 2013 and Beyond.
The U.S. economy is at a critical intersection. Privately-held businesses have long been the driving force of the economy, and are now in a period of transition that has been building up for the last 50 years. Baby boomers own an unprecedented number of businesses and hold an unprecedented proportion of U.S. private wealth. Having propelled the booming U.S. economy since the early 1990s, baby boomers have now reached their peak in the consumer spending cycle.
What impact will this have on the economy, business risk and business transition?
First, we’ll consider a definition: most studies classify those born between 1943 and 1964 as baby boomers. The leading-edge baby boomers were born between 1946 and 1955, which represents slightly more than half of the generation, or roughly 38 million people. The trailing-edge boomers were born between 1956 and 1964.
Below is a chart that shows the U.S. birth rate (births per 1000 population) from 1909 to present. The red segment from 1946 to 1964 highlights the postwar baby boom. The 79 million baby boomers account for approximately 25% of the U.S. population.
Wealth Creators and Spenders
While baby boomers may only represent 25% of the population, they hold a disproportionate amount of U.S. wealth and spending power, with some estimates as high 80% of personal financial assets and more than half of all consumer spending driven by baby boomers. Given that consumer spending is such a critical determinant of U.S. economic performance (approximately 70% of U.S. GDP), much has been written about the impact of this demographic as they pass through from early adulthood to retirement.
The renowned demographist, Harry Dent, has an age wave theory that correctly predicted the current economic slump and concluded that the U.S. economy will peak between 2008 and 2012, having seen the peak earnings of baby boomers occur between 1993 and 2012. This is based on Dent’s finding that a human’s consumer spending habits peak by age 50; therefore, as the baby boomers pass this age, the economy reaches a peak in consumer spending until the next cycle begins. During these peak earnings years, baby boomers purchase food, apparel, discretionary assets and retirement programs at unprecedented levels, all of which boosted the economy.
In 2012, the youngest baby boomers turned 47, the average age when consumer spending starts to decline. Notably, earnings continue to increase beyond age 47, but this is the age when an average individual starts to spend less, with children leaving home, and an adjusted focus to pay down debts and focus on saving for retirement.
Risk, Retirement and Business Transition
As of two years ago (January 2011), the oldest baby boomers turned 65. Every day for the next 17 years, about 10,000 more will cross that threshold. An unprecedented proportion of those baby boomers are business owners and many of them without a transition plan of their business.
Many baby boomers have significant concerns about the economy, as well as the need to protect their funds for retirement. In 1970, when the oldest of the baby boomers were in their early 20s, the total publicly held national debt was about $283 billion, or about 28% of the Gross Domestic Product. Now, as the oldest Boomers approach age 67, the federal debt is an estimated $16 trillion, approximately 105% of GDP.
Growing concern with the federal budget and the government’s (in)ability to meet its debt obligations, is causing boomer business owners to want to realize cash from the sale of their business and gain financial security. Having the majority of their wealth tied up in a single asset (their business), which is in turn at the mercy of a faltering U.S. economy, has created a pent up demand of business owners looking to sell their business. An overwhelming number of baby boomer business owners have been sitting on the sidelines waiting for a good time to sell their business. However, given the weak outlook for the economy in the coming years, many of those may decide that they cannot afford to wait for the next rising tide, which could still be many years away. If this occurs in the next few years, there will be a surge in business owners bringing their companies to market, taking advantage of the strong valuation multiples that currently exist.
Business Valuations and Timing
If the mid-term outlook is for a moderate-to-declining economy, is it now time to determine market value and start planning for a sale?
Of course, every business is unique and should be viewed as such; in particular if the business’ future growth opportunity is independent of the performance of the economy. If, however, financial performance and valuations are set to plateau or decline, then it may be time to consider the preliminary work of positioning a company for sale.
Finding the Right Buyer
All buyers are not the same. Each business has a small number of buyers that fit their desired buyer profile and it requires a meticulous and conscientious research, review and screening process. This cannot be done with a few phone calls to known relationships. Whether it is a strategic or financial buyer, it is critical to find the best fit between buyer and seller: fit for the company, the owners and the employees; a buyer that will embrace, nurture and promote the legacy of the business. You also need to find which of these desired buyers will offer the best deal, which includes the most competitive price and then close the transaction on the agreed terms.
All of the preparation and research work can be done confidentially and discretely, without risk of competitors, customers or employees being aware of the process. As we have discussed before, a business owner can ensure a faster and more discrete sale process, as well as a higher purchase price and better terms by taking the time to thoroughly plan, prepare and implement strategic initiatives in advance to better position their business for sale.