What now for the “Baby Boomer” companies? Part 2
Part 2 – Options for retiring “Baby Boomers” to take”
Who to pass to?
Part 1 of our series looked at who the baby boomers are, the important role that they play in our economy and issues they are facing now that they are approaching retirement age. We now turn our attention to the choices that baby boomers have to take and what they can do to minimise risks.
Clearly sticking their head’s in the sand is not the right course of action, with options diminishing the longer the baby boomers wait to take action, so what should baby-boomers do? First and foremost, they need to put in place a transition plan for what they will do when they retire. This will then drive the strategy that they can and minimise uncertainty for everyone involved.
Broadly, we can divide the options for selling baby boomers into four categories
Option A: Family Succession
They need to speak with their family to see who wants to take over the business and ensure that the family member is properly trained and equipped with the right skills and attributes to lead the business. The family needs to see this as an opportunity to ‘inject’ some fresh perspective into the business where new ideas and technology could have an immediate impact whilst also ensuring that the heir apparent truly understands the business and doesn’t alienate its workforce or customers.
This process of succession planning can take many years so it’s important that it is started well in advance so that the successors have the time to be trained where necessary and to become familiar with all aspects of the business. The successor should gain hands-on experience of working in the business, preferably at every level of the business, and have an opportunity to gradually gain a greater say in major decisions in the build-up to the transition occurring. In doing so the impact of the change of control is minimised as its ‘business as normal’.
Option B: Sale to a third party
If they can’t identify a suitable family member then they need to face up to the reality that they will need to sell their business. In order to do so they need to properly prepare the company for sale and ensure that all the legal and accounting documents that will be needed are in place. They need to anticipate the kind of questions and concerns that a prospective buyer would have and have the right information at hand to address these points.
It’s a good idea for them to also bring on board a qualified advisory team who can help them navigate through the preparation, execution and post-closing phases of selling their business. They will have a crucial role in maximising the value of the business and in reducing risk to both the baby boomers and to the business. It’s also important for the baby boomers to try to place a realistic and achievable price for the business, which is often based on multiples of revenues or recent sales of similar businesses in the market. If this process is handled correctly then the baby boomers can hopefully walk away with a decent amount of money to retire on.
As mentioned in our previous article with over 8 million private businesses anticipated to be sold or exited in the next 12 to 15 years, competition will be fierce to attract buyers. Consequently, it’s crucial that the retiring baby boomers structure the business to maximise its perceived value to potential acquirers. Furthermore, identifying these buyers well in advance will enable the sellers to position the business to be more attractive.
Option C: Management buyout
If they can’t find a family successor or sell the business then another option could be to sell the business to a select number of current employees, which is a process more commonly known as a managerial buyout. They could even opt to sell the business to all employees although in practice this is exceptionally rare and carries a number of legal and logistical challenges.
The issue with a management buyout is that it often means that the sellers won’t get the sale price immediately and may have to wait a number of years for the purchase price to be eventually paid. This naturally causes considerable uncertainty and can create issues for planning their retirement. It can also create potential cash-flow issues for the business. However, management are likely to have an in-depth understanding of the business so are likely to be able to continue running it with minimal impacts as a result of a change of ownership.
Option D: Dissolution
The fourth and least preferable choice is for the sellers to wind up the company and to sell off its assets on a piecemeal basis to third parties. Naturally this is not a preferred choice as it’ll destroy the business that the baby boomers had worked on and will leave many employees unemployed. Nevertheless, sometimes this will be the only choice available if no family member is prepared to run the business and no external third parties interested in taking on the business.
Clearly there are options available to the sellers, what matters is that they recognise that they need to take action and the earlier that they do so the better. Leaving succession planning to the last minute will reduce the options available and only lead to an increase in the likelihood of dissolution.
The final part of our series will explore what we consider to be the huge potential benefits of this phenomena occurring and what we think it means for innovation in general.