Wave of Retiring Boomers Selling Their Businesses Will Create a Glut
by Paul W. Ewing
Market cycles and credit crisis aside, baby boomers are facing a new storm on the horizon that they’ll have to navigate in order to arrive safely at retirement.
It is easy to imagine that those baby boomer business owner—the first of whom turned 62 this year—plan to convert their business equity into cash, or at least an income when they retire.
In the next 10 to 15 years, it is expected that more than 8 million privately-owned U.S. companies will change hands. When the time comes for the owners to exit these companies, they will face several options.
Some may choose to retain ownership of the business throughout their retirement, but play a passive role in day-to-day operations. This is more difficult than it sounds since most small business owners have the bulk of their savings wrapped up in their companies and need to sell their companies to pay for their retirement goals.
They might decide to transfer the company to the next generation. But in order for this to work; the next generation [i.e. the kids] have to be interested in owning and continuing the family business. Even if they are interested, they still need to be qualified to make it work. Successful family transitions require years of planning and preparation, so unless the retiring business owner has time to put a transition plan in place, a next generation sale may be out of the question.
More likely is that the vast majority of retiring boomers will sell their companies on the open market. And if the market suddenly becomes glutted with boomer-owned businesses, that probably spells bad news for sellers.
The financial services industry is well-suited to accommodate the retiring wage earners, but the need for business succession plans for this horde is just now being recognized.
Interestingly, in my profession more than 55 percent of financial professionals are 55 or older and a far greater percentage of the practice owners are approaching retirement. Here are some concepts and some steps you may want to investigate now:
•Ask yourself if you would/could sell your business sooner to avoid the glut.
•Get with your Financial Planner to determine if your financial assets are sufficient for a secure retirement. This process is known as a Retirement Feasibility study and the most progressive studies “stress test” the assumptions against the potential and historical market fluctuations.
•The value of your business to a buyer is a multiple of the “business owner’s benefit,” not the net income, if the net income includes compensation for work performed. Simply put, a buyer doesn’t want to “buy a job.”
•To illustrate: two business owners have similar businesses with similar revenues and expenses. One works hard in the business and earns enough to be compensated fairly for his efforts. The other is less active and takes a smaller but equally fair wage and still has earnings left. Those earnings after fair compensation make the second business valuable and sellable, the first business is not likely to have much, if any, fair market value.
•If your current valuation is a disappointment, start now to build equity in your business, start building up the “business owner’s benefit.”
•Get a market valuation of your business. These are available from your tax, legal and financial advisors and range in costs from very modest to very extensive, and expensive.
Let your tax, legal and financial advisors in on your plans, even if they aren’t etched in stone yet. Ask them to help you critically scrutinize your plan. Armed with the information to make an informed decision, you can maximize the benefit from the business you built. 
Paul W. Ewing, CFP, AAMS is President, Prosperity Advisory Group
P | 913.451.4501
E | paul@prosperityworks.com