IBA, as a forty-five year old business brokerage firm, has successfully facilitated business purchase & sale transactions during periods of prosperity and difficulty in numerous economic cycles. One of the pleasant surprises in the mergers & acquisitions marketplace during COVID-19 is that, with the exception of an assessment slowdown in March & April, buyer demand has remained strong for quality, mature companies. This information is being conveyed from the trenches by experienced, knowledgeable intermediaries and is documented in our offices with the six deals we have completed since May 1 and the ten transactions IBA presently has in escrow pending sale for later in the summer and autumn.
A question commonly asked in our conference rooms by potential clients is should I sell now or in the future? The motivations for selling now include the desire to retire, reap the financial rewards of quality execution and hard work, and taking advantage of the present long term capital gains tax rates. The advantages of selling in the future are that a business owner gets to continue doing what they enjoy and reap the financial benefits of ownership. Every successful business owner is ahead economically, all things remaining constant, by owning a business another year and selling for the same or greater value in the future.
A cursory look at the population sizes of the Baby Boomer Generation (People born between 1946 – 1964) and Generation X (People born between 1965 – 1980) might cause an entrepreneur concern that the supply versus demand dynamic might change as Baby Boomers try to retire and sell their businesses due to the smaller size of the next generation.
As a twenty-six year professional intermediary compensated on performance with payment of a commission on the sale of a company, it is in my best interest to tell business owners, you should sell NOW!!! and justify that action. However, as a professional affiliated with a firm that lives by the “Golden Rule” of do unto others, as you would have them do unto you, it is my pleasure to share my assessment that there is no urgency, other then potential changes in tax rates and government policy, to move forward the sale of a profitable company where an entrepreneur goes to work with a smile executing their vision, in the next five to twenty years, unless there is personal motivation to create an exit strategy. The reasons I believe a robust group of buyers will exist beyond 2040 for privately held companies and family businesses are as follows:
It is true that the front end of the Baby Boomer generation has started to transition into retirement and that Generation X is smaller in population than the preceding generation. However, the business sale marketplace is not a B must replace A marketplace. The reality of the situation is that three generations (Baby Boomers, Generation X, and Millennials), a group with no biological clock, and an external population to the United States will be seeking acquisition opportunities involving quality companies far into the foreseeable future.
The second half of the Baby Boomer generation was born between 1955 – 1964. This group has approximately 35 million members between the ages of 56 – 65. This group is anticipated to remain active members of the entrepreneurial community for another five to fifteen years. Many in this group are actively seeking business acquisitions currently and should continue past 2035 for the following four reasons:
- Business is the ultimate sport. The thought of getting out of the game of business is not attractive to many people with entrepreneurship in their DNA. It is not uncommon for an entrepreneur to acquire a business (Perhaps to mentor a child or build a legacy) and/or desire to work well into their 70’s.
- Retirement savings are insufficient. It is much easier to maintain a desired quality of life with an inflow of capital than trying to stretch the lifespan of a diminishing asset base. Business ownership is a wonderful tool for deferring tapping into retirement accounts while having an opportunity to create a desired work/life balance.
- Return on Investment for Wealth Creation. Owning a privately held company offers one of the highest returns on investment opportunities available in the marketplace (Commonly 15 – 35% depending on the industry and size of the business). These returns on investment are reflective of the inherent risk associated with being in busines for yourself. That said, many entrepreneurs would prefer to “bet on themselves” with their capital resources than invest in assets they do not actively control.
- Corporate Cost Cutting. Unfortunately, experienced, highly paid management personnel are often evaluated with a critical eye in the corporate world. A perception exists that bottom lines and productivity have the ability to be enhanced through replacing senior personnel with younger, less costly, highly motivated people. This dynamic often creates situations where people are forced to look for jobs before they are ready to retire. These individuals are excellent candidates to purchase businesses as they have significant knowledge & experience and the capital resources necessary to make down payments and obtain acquisition financing. One benefit of entrepreneurship versus employment is the opportunity to sell a business for value reflective of its performance. It is not uncommon at IBA, as a 45-year old firm that has successfully facilitated over 4200 transactions, to sell a business for a party that previously purchased the company through IBA.
Following the Baby Boomer Generation is Generation X, a group of roughly 65 million in size. This population is currently 40 – 55 years of age and has only recently reached a point where the entire spectrum of the generation has the experience and resources needed to buy privately held companies and family owned businesses. It is anticipated that members of this generation will be buying businesses aggressively for the next thirty years.
Directly behind Generation X is a generation, the Millennials, that is approximately the same size as the Baby Boomer generation. The front 1/3 of this group is already contributing buyers to the marketplace. One new market method this group is employing to overcome a shortage of acquisition capital is partnering with investors using a Search Fund model, where a rising business star contributes sweat equity to the company as executive management while being backed by parties looking for a double digit return on their capital investment and an opportunity for appreciation in value when their ownership position is bought out in the future.
The three generations described above assume an acquisition model where a high net worth individual purchases a company for their own direct management. These type of transactions are common for deal sizes between $1,000,000 and $10,000,000. However, at approximately $5,000,000 another group of buyers enters the market. These buyers are entities rather than individuals. Entity buyers in deals successfully facilitated by IBA include privately held companies, publicly traded companies, private equity firms, and non-profit organizations. The lifespan of many of these entities is perpetual. The following article identifies some of the most founder friendly private equity firms in operation in the United States (https://www.inc.com/magazine/201908/graham-winfrey/private-equity-investment-firms-founder-friendly.html). An example of a non-profit organization that has purchased a company in an IBA facilitated transaction is Northwest Center (https://www.nwcenter.org/). Northwest Center was founded in 1965. I expect the organization will celebrate its 100 year anniversary in 2065.
In addition, to the above domestic buyer groups, 1st generation immigrants are regular acquirers of businesses in the United States to facilitate immigration and/or entering the economy at an appropriate level based on their knowledge, experience, management ability, and capital resources. It is easier for many of these individuals to secure an executive management position through acquisition than to get hired by Amazon, Microsoft, Boeing, or Nike, especially when English is not a first language.
90% of IBA clients are selling their businesses because they want to sell, not because they need to sell. It is my recommendation to all entrepreneurs that they continue profitably doing what they enjoy until they are emotionally and mentally ready to sell their businesses. A robust marketplace will be present today, tomorrow, and in the foreseeable future for the sale of their companies. Similarly, IBA, like Mt. Rainier and Mt. Hood, rising above Seattle and Portland, will also be available to professional facilitate the sale in 2020, 2030, and 2040 like we have for Pacific Northwest entrepreneurs since 1975. There is no replacement for stability, knowledge, and experience in a professional advisor.
Gregory Kovsky, the President & CEO of IBA since 2000, has personally facilitated over 300 transactions involving privately held companies. He is recognized nationally for his knowledge & experience as a “sell side” broker in the manufacturing, international import, industrial, marine, construction, technology, and horticulture industries and a commonly published author and seminar speaker. Mr. Kovsky has held a real estate brokers license in one or more states since 1994 and has the ability to comprehensively represent entrepreneurs in the sale of their privately held companies and commercial real estate. He is honored to represent IBA as a member of the Seattle chapter of The Professional 50 along with Bill Southwell, and have Stephen Cohen represent the firm in The Professional 50 chapter in Portland.
Contributed by Gregory Kovsky