Business analysts believe the retirement rate of Baby Boomers will leave a glut in the businesses-for-sale market.
The fourth-quarter Market Pulse survey from the International Business Brokers Association and M&A Source found that Baby Boomer retirement was the top reason respondents decided to sell. It was the first quarter in history that Boomer retirement topped that list.
As the economy recovers and businesses put distance between themselves and their worst years, owners are beginning to feel good about selling, said Ron Chernak, president of First Business Brokers in Colorado Springs.
Business owners have sold for a lot of reasons over the 30 years Chernak has been a broker — relocation, going in a different direction professionally, profit, family reasons and retirement.
“We are seeing more people selling for retirement than for any of the other reasons we usually see,” Chernak said. “A lot of the businesses that people would have put on the market in 2009 had to wait. This logjam is freeing up a little now and they can sell.”
The oldest of the Baby Boomers are 67 now. Many probably would have started selling their companies four years ago, said Chris Blees, president and CEO of BiggsKofford, a CPA and corporate mergers and acquisitions firm.
“This is nothing new,” Blees said. “It’s not like we didn’t realize all these Baby Boomers would be retiring and that a lot of them owned businesses they would need to sell.”
A couple of Blees’ friends, Richard Jakim and Peter Christman, wrote a book in 2007 giving the world a heads-up. The book is titled “The $10 Trillion Opportunity,” referring to $10 trillion expected to change hands between then and 2020 as Boomers sold their companies. The opportunity would be for business brokers, bankers, CPAs and lawyers who manage big, complicated business transactions.
Long-term, Blees said, there’s tremendous opportunity for anyone with the skills to manage those transactions.
“Short-term, though, is kind of odd,” Blees said. “As soon as that book was written, we went into a recession.”
During the recession, business transactions plummeted. No one could borrow to buy a business and owners didn’t want to sell at the bottom when the only buyers were scavenging for bargain-basement deals.
“So, you could look at the last five years and say the book was wrong,” Blees said. “But the truth is, we haven’t lost that $10 trillion opportunity, we’ve just compressed it.”
What would have taken 15 years still is going to happen, Blees said, but four or five years faster than projected.
Chernak said business is already picking up. Specialty contract businesses, which weren’t on the market the past several years when construction was all but stopped, have started to re-emerge, he said.
They’re not alone. Chernak has done twice the volume of transactions in the first two months of this year as he did by March 2012.
“The number of transactions is still down from the peak in 2007,” he said. “But the multipliers (the valuation of the businesses) are approaching 2007 levels.”
That could be because supply and demand are starting to reverse. There have been potential buyers out there with nothing to buy for several years. As the market slowly recovers, the businesses coming on can demand good prices.
Nationally, brokers say the market is quickly transitioning from a buyer’s to a seller’s market. According to the IBBA survey, 53 percent of brokers believed they were in a buyer’s market during the fourth quarter of 2012. That was down sharply from 70 percent in the second quarter.
Chernak expects to see continuing increases in transactions. So does Blees, who said the market will overcorrect and likely be saturated with business by 2017 or 2018.
“Eventually, there’s going to be an oversupply of businesses,” Blees said. “Obviously, values will drop. But if you’re an average or below-average company — I think there are just going to be a lot of businesses that don’t sell. They’re going to find themselves in a sea of companies.”
He said there was a surge of business transactions at the end of 2012, but that was primarily owners trying to get out ahead of changes to the capital-gains tax laws. The next year or so likely will see gradual gains in business transactions. And average business owners who can sell now will probably see better returns today than if they waited five years.
“There’s going to be a lot of competition,” Blees said.