Whether you are a member of the baby-boom generation born between 1946 and 1964, or a member of the generations of younger people that follow, you may be surprised to learn boomers are as likely to buy a business as to sell one.
The myth of the young entrepreneur
The numbers from the California Association of Business Brokers are staggering:
- Boomers 55 to 64-years-old form businesses at the highest rate of any age group.
- Retiring business owners will sell or leave to others $10 trillion worth of assets held in more than 12 million businesses over the next 20 years.
- The sale of these 12 million businesses over the next two decades will represent a major increase in the number of businesses sold annually.
- Many of the small and mid-sized businesses likely to change hands are projected to involve a large number bought and sold by baby boomers.
- In the coming decades, not only are we likely to see millions of baby boomers selling businesses, but we will also see additional millions of boomers (those of you who’ve spent your lives working for someone else), buying businesses.
Largest financial transaction of your lifetime
The purchase or sale of a small or mid-size privately held business will have a major impact on your personal financial situation. Research from BizBuySell.com paints a picture of the typical buyers and sellers of small businesses in the U.S.
If you feel too young to retire, you may be considering buying a business. You have talents and job-related skills honed through a lifetime working and you may have become disillusioned from company layoffs or corporate bureaucracy. Perhaps you are frustrated by not being paid what you feel you deserve. You typically have ample capital through savings, investments, or other assets accumulated over the years. You want the decision to buy a business to be an informed one with the potential for a significant return — financially and emotionally. You are likely to be a white, college-educated married man in your late 40s, and yet as a group, prospective buyers are slightly more diverse in age, ethnicity, and country of origin than prospective sellers.
“The number one motivation for purchasing a small business is the chance to be your own boss, cited by 63 percent of all buyers.” Source: BizBuySell.com
If you are considering selling your business, you may either be ready to retire, burned out, or you may be ready to move on to buy what can become a bigger business in a different field. While most of you are likely to be a white, college-educated man age 50 or above, many of you are not. A full 40% of you are in your 40’s or younger, 29% lack a college or trade/vocational degree, and 22% of sellers of successful businesses are women. If you have a parent or grandparent who owned a business, or you yourself have owned and sold a business before, you are the most likely to be a serial entrepreneur.
“Once you get into small business ownership, it tends to be something you stick with. Fifty-eight percent of sellers have owned a business before.” Source: BizBuySell.com
Whether you are considering buying or selling a business, you need to assemble a professional team to advise you about what is often the largest financial transaction of your lifetime.
Where to start
Start with your end in mind. Five years from now, how do you want your life to be different?
- After 20 years of following the dreams and systems set by others, are you ready to be your own boss?
- Do your loved ones understand your dream of being a business owner — and the impact it will have on your future together?
- After years of long hours building up your business are you now looking forward to a complete break in retirement with the classic golf course and grandchildren scenario?
- Is it important to you that whoever buys your business shares your values and loyalty to your employees?
- After years owning one type of business, are you ready to buy and grow something larger in a different sector?
Three basic transition strategy options
With your end goal in mind, you have three basic strategy options for selling (or buying) a business:
- Selling to/buying from an outside third party
- Selling to your employees, or buying with your colleagues
- Selling or gifting your business to family members, or buying the family business
Each business transition strategy has its own challenges — or rewards, depending on your goals as well as the sector, size, and situation of the business. That means each business transition strategy requires a careful assessment of the business being bought or sold, as well as the impact on your personal financial situation.
Due diligence documents to gather or review
Recommendations vary based on the business sector, size, and situation, but you can expect your financial planner, business broker, attorney, or CPA to ask for:
- Personal financial information (account statements, complete copies of federal and state tax returns, estate documents)
- Business financial documents:
- A minimum of five years of financial documents
- (Audited) financials for three years
- Pro-forma sales and cash flows for two years
- Three years of tax returns
- Company insurance documents
- Customer lists
- Vendor lists and relationships
- Contracts with vendors, suppliers, customers and clients
- Employee profiles and employment contracts
- Corporate legal documents and records
- Intellectual property rights and assets
- Operating systems and procedures for every major part of the business
Developing the business transition plan for your chosen strategy
Now that you have done the heavy lifting, you are ready to develop a business transition and financing plan that will work for you. Local communities want to retain jobs to support a strong economy and there are many resources available to help you.
As noted in previous articles about family business transitions, the SBA is a great resource and provides information on the basic differences between an outright purchase/sale with immediate payment, a gradual purchase/sale, and a long-term seller-financed purchase/sale. The Vermont Employee Ownership Center is another resource that provides educational seminars if you want to sell your business to your employees or for employee groups interested in purchasing a business.
Can you imagine yourself in five years?
If you started with the end in mind, you will have a clear picture by now of your future as a business owner — or former business owner. Small business ownership is as much about freedom as it is about money, and both are simply tools to achieve your personal life goals.
Heidi Clute, CFP® is co-owner of Clute Wealth Management in Plattsburgh, NY, and South Burlington, VT, an independent firm that provides strategic financial and investment planning for individuals and small businesses in the Champlain Valley region of New York and Vermont. For a list of states in which we are registered to do business, please visit www.clutewealthmanagement.com.