Sales of small businesses in America continue to rise. Just look at the recent report from BizBuySell which showed that there were 1,935 closed small business transactions in the second quarter of 2016. That is a 1.15 percent increase compared to this same period last year and a 71.39 percent jump from Q2 2012. Some of this growth is of course due to the continued economic recovery in this country, evidenced by the similar gains seen in revenue, cash flow, and the median small business asking and selling prices over the past few years. However, another increasingly important factor behind the uptrend in small business sales is the aging U.S. population, i.e. Baby Boomers.
Indeed, older Americans that own their own business will eventually reach an age where they will want to stop managing the day-to-day operations of their company. Passing on such responsibilities, along with ownership, to one’s children is an option but it appears that most owners would rather sell their company to an outsider. For example, a Pepperdine University study found that around two-thirds of business sellers recently have been Baby Boomers, and Bob House, president of BizBuySell, added that “Despite the many deals already completed over the past few years, there still appears to be a strong supply of listings, driven by retiring Baby Boomers, and at the same time, qualified buyers with access to capital.”
One apparent reason for the increased desire to sell is to help fund retirement because 28 percent of Baby Boomer small business owners surveyed by TD Bank said that they “are not very or not at all confident” that they have enough savings to achieve their desired old-age lifestyle. Further, an FPA/CNBC study conducted last year found that more than three-quarters (78 percent) of surveyed small business owners said that they plan on selling their company in order to satisfy 60 percent to 100 percent of their old-age income needs.
Such a large dependence on a single asset could put the financial security of these soon-to-be retirees in a precarious situation should their company not sell for the price they had anticipated (and developed an old-age budget around). Moreover, just as retail investors should diversify the stocks they hold in their portfolio, small business owners should aim to diversify their retirement savings vehicles (401(k)s, IRAs, etc.) and in turn lessen their overall sensitivity to the eventual selling price of their company.
Sources: BizBuySell, Pepperdine University, CNBC, FPA, TD BankPost author: Charles Couch