Small business valuations, the impact from baby boomers
Some commentators are predicting a flood of businesses coming on to the market over the next few years that will drive the prices and valuations of small businesses down – this author is not so sure.
In looking at this topic it is first necessary to gain an understanding of the main statistics and facts that revolve around the baby boomer age group. According to the Australian Bureau of Statistics baby boomers are defined as persons born between 1946 and 1964. In today’s terms their age is 51 – 69 years. Around 64% of working baby boomers plan to retire between the ages of 60 and 69, 24% at age 70 or older and 12% younger or not sure. The overall average age of retirement at the time of these statistics in 2007 was 63 years of age. Main reasons given for retirement were:
- Financial security 39%.
- Personal health or physical abilities 19%.
- Eligibility for aged pension.
- Age to access superannuation fund.
- Retirement of spouse or partner.
- Being retrenched or made redundant.
- Caring for spouse or family member.
- To spend more time with spouse/partner/family.
- To have more personal leisure time.
Effects of the GFC
It is likely that some of the aforementioned reasons for retirement have been impacted by both economic events and Government legislation since 2007. In particular the Global Financial Crisis of 2007/8 and resultant share market decline in 2008/9, had a substantial impact on prospective retirees’ superannuation balances. Hence, the main reason for retiring (reaching financial security) will be delayed for many as they wait for this nest egg to recover to a point that they can afford to retire.
Government legislation will also affect younger baby boomers in regards to when they can access both superannuation and the aged pension, given that the Government has increased these respective ages in recent years. All of these factors are likely to mean that the average age of retirement will increase. From a business owner’s perspective, it is likely that they will hang on longer before exiting.
Perhaps larger impacts for business owners over recent years is the reduction in average business profits and therefore business values. The Australian Chamber of Commerce and Industry reports that the profit trend for small business between 2008 and 2012 was negative (effectively since the GFC). The lower profits and therefore resultant lower business values have reduced the size of the retirement nest egg and will logically lead to delayed retirement for existing business owners.
There are currently around 1.5 million privately owned businesses in Australia of which approximately 500,000 are owned by persons over the age of 55 years. It is also interesting to note that around 57% of total wealth in Australia is owned by persons over the age of 55 and more than 80% is held by persons over 45. More than half of this wealth is held in property, with the older age group having benefitted from large capital gains, particularly since the late 1980’s. With banks reluctant to lend purely against business goodwill, it is a serious issue that the younger prospective business purchasers (under the age of 45) do not typically have the collateral or equity in their homes to be utilised as loan security.
It’s already happening
Some commentators estimate the total number of businesses for sale in Australia to be in excess of 40,000. Those formally listed on business for sale websites show a far lower number in the range of 14,000 to 15,000 and if new franchise / license and distribution opportunities are taken out this number falls to around 9000. The vast majority of business brokers agree however, that the current supply of businesses for sale is well in excess of current demand.
A survey conducted by the Australian Institute of Business Brokers in 2014 overwhelmingly revealed that the number one reason for selling businesses is retirement. Business brokers in recent years are also reporting an increased incidence of offers to purchase not proceeding to settlement due to lack of ability to gain finance.
There are of course various ways for baby boomers to exit their businesses including outright sales, management buyouts, sales to family members, sales to /merging with competitors. It is this author’s view that given the lack of collateral held by younger purchasers, that increasingly more planning and thought will be required for the transfer of small business ownership from the older to younger generations.
The challenge is for the business fraternity, including business owners, purchasers, brokers, accountants, financiers, financial adviser/exit strategists and valuers to work together to facilitate an efficient transfer of businesses. Improved structuring of vendor financing, sale of shares and greater overall thought given to exit strategies are examples of initiatives to aid this transfer. It is also envisaged that greater interaction by the business fraternity with banks and non-bank lending institutions would be of benefit. Such interactions to pass on knowledge and understanding of the small business market place, risk profiles for different business types, profitability/repayment ability and business values, may in turn increase the scope for borrowing in this sector.