White Paper - The Fabled Wealth Transfer:Urban Legend or Reality?

According to the Federal Reserve Survey of Consumer Finances, 50,000 businesses changed hands in 2001, which was about average. By 2004, the Federal Reserve Survey reported the number of companies sold increased to 350,000 and it goes on to project that by 2009, 750,000 will be sold. This can admittedly be a little misleading: while there are 23, 343,000 businesses in the United States, only 5, 697,759 actually have employees, obviously leaving a lot of very small and home‐based businesses (a total of 17, 646,000 of them in fact). Nevertheless, these too will usually require some sort of support services in transferring the business to a third party.

But to put the real middle market baby boomer business transfer opportunity into perspective, consider this. The US Census Bureau in 2002 estimated there are a total of 5, 697,759 businesses in the United States with one or more employees (usually many, many more) with sales totaling in excess of $22 trillion. Assuming a conservative 50% value to revenue ratio, that equates to a market value of $11 trillion. While Census data indicates that many of even these totals are small mom‐and‐pop businesses (79% of them in fact with under $1 million in sales), almost 21%, or 1.2 million, are middle market firms with sales of $1million to $1 billion annually. Collectively these 1.2 million firms had sales totaling $9.8 trillion and carry a conservative market value of $4.93 trillion. Most of these, based on population data, will be sold or otherwise disposed of (left to family members, for example) by baby boomer who own about 67% of those middle market businesses. In fact, based on the assumption that most of these will be disposed of by their owners at around age 65, there will be over 800,000 middle market businesses with an estimated total value of $3.3 trillion disposed of between 2011 and 2029. On average, about 43,000 a year from 2011 until 2029, and that is just the baby boomers and…just the middle market....

If you’re a business owner, the best favor you can do yourself is to begin to think about exit planning now, even if you have no intention of selling your company. The second imperative is to get professional help from a financial professional trained in this field.

Once you sell a business, you’ll only know how much you got for it. There’s no way of knowing how much you could have gotten if you had professional advice. But the difference is almost always substantial. “When business owners get professional help, they can occasionally get two or three times as much as when they sell it themselves,” says Dennis Roberts, CEO of the McLean Group. “And without a doubt, the owner will almost always be able to get at least 20 percent more than he or she otherwise might have; so the fees are worth it.” Roberts notes that his figures are based on extensive review on large numbers of reported transactions and business comparables.

If there’s a dark side for the business owner in all of this, it’s this: All these sales will be happening in a relatively short amount of time. The tidal wave is business owners hitting age 65 in the next 20 year, and there are a lot of them. At some point, there will begin to be a glut and a need for buyers, which could conceivably drive prices down. The best way to avoid getting caught in that is to get ready now.