The Coming Business Brokerage Market
Over the past two years, I’ve been writing about how active the business brokerage market has been and how it is expected to become even more frothy. Most of my more recent posts on the subject have been to wax philosophical about the amount of money sloshing around most of the world – with the notable exceptions of Somalia and Venezuela – all of it searching for someplace to land that will provide a reasonable return to its owners.
More money looking for businesses is a good thing. The age-old law of supply and demand suggests that increasing demand – more money – results in higher prices. This logic suggests that business valuations are rising – and so they are. For business owners, the availability of capital and the expanding economy that has been the result of tax and regulatory reform in the United States, further suggests that this would be an excellent time to cash out.
And it is.
The past two years have seen a growing number of owners transitioning out of their business – and not only in the United States. We’ve seen the trend pretty much anywhere in the world with private property rights and the rule of law.
Well, now comes a report from UBS stating that the owners of 41% of closely-held businesses expect to exit their business in the next five years. Forty-one percent! Of these, 52% plan to sell, 20% plan to leave their business to family members, 10% don’t know what they’re going to do and an astonishing 18% plan to close their business entirely!
I’m going to tackle the three smaller groups over the next month, but today I’m going to focus on the number that plan to sell.
Translated Into Numbers
According to the U.S. Small Business Administration, there are roughly 29 million U.S. businesses with fewer than 500 employees – the SBA’s definition of small business. Applying the math of the UBS survey, more than 6 million business owners will want to seller their business in the next five years in the United States alone. Six million.
What does this tell us?
First, it tells us we should re-familiarize ourselves with the previously-mentioned law of supply and demand. This projected wave of businesses coming to market – the proverbial Silver Tsunami – could very well offset the upward pressure on valuations caused by the large and growing amount of money in the market place. More supply exerts downward pressure on prices.
Given that we are at the beginning of this trend, the best time to bring a business to market could be over the next two to three years; before the Silver Tsunami breaks on the rocky shores of the market as Baby Boomers around the planet decide that spending more time on the world’s golf courses is preferable to dealing with vendors, customers, employees and the inevitable intractable bureaucratic leviathon that seemingly exits solely to frustrate the intrepid owner.
The second thing this trend tells us is that the demand for knowledgeable advisors – professional business brokers and M&A advisors – will grossly outstrip supply.
The Business Broker
Where are all these business owners going to go for advise and guidance? As talented as attorneys and accountants are, they are not trained as business brokers. The nearby quote is included in the UBS report and illustrates the issue each business owner will face – and the demand for professional business brokers.
Business owners need to prepare their business for sale but most of them don’t know what that entails. (A post on this specific topic is planned shortly.) Business owners need to know what their business is likely worth – and most of them have no idea. (A post on this topic is also planned for April.) Where are they going to go to find this expertise? Not at the local library or Chamber of Commerce.
Our course, The Basic “How-To” of Becoming a Business Broker”, teaches how to become a professional business broker.
Become a Professional Business Broker…
The Bottom Line
Based on my experience over the past year or so, business owners are beginning to recognize that they need help selling their business and, more importantly, that help is not easy to find. Calls and emails aren’t returned. Referrals don’t pan out. Experiences with faux business brokers – those that hang out shingles but have not training in the profession – frustrate owners to a degree rivaled only by trying to comprehend the tax forms.
We need more professional business brokers. Men and women that have been trained to understand what the profession requires and coached in the establishment of their practice.
If you have any questions, comments or feedback on this topic – or any topic related to business – I want to hear from you. Put them in the Comments box below. Start the conversation and I’ll get back to you with answers or my own comments. If I get enough on one topic, I’ll address them in a future post or podcast.
I’ll be back with you again next Monday. In the meantime, I hope you have a profitable week!
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