The numbers are in, and the reality can be overwhelming.
Ten thousand adults born during the Baby Boomer era of 1940 through 1960 are retiring every day in the US.
2010 was the year that Millennials became the largest generation in the work force. 2011 was the year that women replaced men as the largest gender in the work force. These facts illustrate the chaos that faces entrepreneurs that do not have a clearly defined succession plan. Who will buy your business?
Entrepreneurs prior to the financial horrors that began in 2008 typically would use EBITDA times an industry multiple to arrive at a sales price for their business. EBITDA is defined as: earnings before interest, taxes, depreciation and amortization. This is an approximate measure of an organization’s operating cash flow based on data from the organization’s income statement. The multiple is the number of times that the sum of EBITDA would be multiplied to achieve a business value used in the sale of a business.
Some industry’s multiples ranged as high as eight times EBITDA before 2005. So a company could have an EBITDA of $200,000 in an industry with an accepted multiple of 8 would have a sales price of $1,600,000.
After the economical collapse of the market place in late 2008, many of the small and mid-sized businesses now have negative EBITDAs. That means they are potentially valueless. To further acerbate the exit issue, multiples are flat, or just 1.
Many business owners who have built tremendous sweat equity in their business are placing those businesses for sale only to find out they are worth far less than imagined. Businesses were sold during 2009 and 2010 for 10% of clear asset value. There is no longer value assigned for good will. The economy could continue to be stagnant, long term buyers could retire, die or switch allegiances when the business owner leaves, so good will just doesn’t exist.
Some businesses have no assets. They only have transformational relationships with loyal clients. That is not a saleable asset resulting in no value. Too often, these boomer entrepreneurs did not have a good work/life balance which resulted in their children not wanting any part of their parent’s business.
A boomer entrepreneur has typically built their business model with an exit strategy that would include selling to other boomers. With their rapid departure from the work force, boomer clients are no longer buying. Those that remain in the work force are more concerned about harboring their assets than taking on more risk.
The typical Generation X worker has not achieved the asset base of the older generation, and has exhibited a tendency not to take financial risk. The Millennials are the most logical option with which to build an exit strategy.
To maximize the value of their business, boomers should bring on younger staff that share the same core values as the owner, but understand the current marketplace. Boomers can use the marketing skills of younger workers to find new market share. They can learn how to make their brand image current and relevant. Boomers can learn from Millennials how to change, develop or adapt products to serve current needs. Millennials have a great grasp of today’s marketplace. These steps will lead to an increase in perceived business value for the organization.
A major benefit of bringing young fresh minds into an established business is that it allows the maturing entrepreneur to develop a potential buyer for their company. The business owner can spend several years using their acquired emotional intelligence to help the younger workers turn the business around. Then the owner can sell the business to the younger, now trusted, employee at a fair rate and with trust that the sale price will be paid and the legacy of the business will continue.
Universities offer entrepreneur courses and degrees in entrepreneurship. Students are better prepared than ever to operate a business. Many of these entrepreneur students do not have a product. They just want “ownership”. This is where young talent can be found that could eventually purchase a boomer’s business.