“An estimate of 65% to 75% of all small businesses will go up
for sale in the next five to 10 years.
Why? Retiring baby boomers.” – Inc. Magazine, April 2008
Inc. magazine published a few articles recently about the
affect that baby boomers will have on business sales:
It has been no secret in our industry (business brokerage
and M&A) that a surge of businesses will go up for sale. In fact, some in our
industry are pretty gleeful about it, just waiting for the surge. Particularly happy are those that sell
business brokerage franchises or training programs. I believe the surge will
come, and I’m hoping there will be enough demand (buyers) to keep up with
it. I don’t want to see a situation
where a business owner / baby boomer works 15 years building a business, only
to have to sell it for peanuts. It
wouldn’t be good for them, or for me.
Historically this hasn’t been the case. Business valuations, based on earnings, have
stayed surprisingly constant over time, even through recessions. It is important to note that the valuations
are based on earnings. Certainly
valuations on average may come down during certain periods (such as now)
because some sectors have seen erosion in earnings. But valuation as measured by the multiple of
earnings is pretty constant.
They stay constant because they are based on solid fundamentals. Pay too much more for a business (than the
average multiple for that type of business) and you can’t pay the debt and make
a living. When prices drop, the
businesses become more lucrative in terms of how much cash a buyer can take out
each year, and that attracts more buyers.
Simple supply and demand, really. So a surge in five to 10 years will cause
more businesses to hang a for sale sign, and we’ll just have to see how many
new buyers will want to step into business ownership.