Since they were born, the baby boomer generation has had significant impacts on trends in the U.S. In fact, there’s a name for their influence: the boomer effect.
The COVID-19 pandemic amplified the baby boomer retirement trend, accelerating workforce departures as employers struggled in the early months of stay-home orders, furloughs, and layoffs. Many of those who had been working were trying to compensate for financial losses incurred during the Great Recession of 2008-09.
Then, as the initial pandemic shock wore off and gave way to the Great Resignation, many began to rethink their plans and choose to retire, at a rate some experts estimate to be about 10,000 per day.
This includes business owners. And since many owners of closely held companies have most of their wealth invested in their businesses, that calls for an advanced exit strategy and succession plan to help ensure they aren’t negatively impacted by a flood of businesses hitting the market.
In this article, we’ll explore the potential problems posed by a mass exodus of business owners, and whether employee ownership can offer a possible solution that benefits all stakeholders: sellers, employees, and even members of the surrounding community.
Baby Boomers & Retirement: The Silver Tsunami By The Numbers
Here are a few of the factors that add up to a potential surplus of businesses for sale:
- Out of about 73 million U.S. baby boomers, 30 million left the workforce just in the third quarter of 2020
- According to the U.S. Census Bureau, by 2030, all baby boomers will be 65 or older
- Average U.S. retirement age is 64
- As of 2019, only 24% of U.S. retirees waited until they were at least 65 to retire
- Baby boomers own about two-thirds of the 4 million U.S. companies with employees
Critical Questions Surrounding Retirement and Exit Strategies
The Great Recession may have pressed some owners to put off retirement, but as time marches forward, the inevitability of exit and succession becomes easier to see — especially in light of average retirement ages. This points to a question: could a surplus depress sale prices?
There are also questions about who is in a strong position to purchase these businesses. Many millennials are already saddled with significant debt and may not have the stomach for the risk of sole ownership. And transferring ownership to children isn’t necessarily right for every family-owned business transition.
M&A (mergers and acquisition) firms are also getting in on the action, with some urging owners to scale up in advance of a sale in order to maximize profit potential on the transaction. But that can present its own risks and challenges by pricing more buyers out of the running.
And while some business owners don’t feel the urgency to retire or even begin planning an exit today, many cite other reasons for their lack of planning, such as fear of giving up their income and a lack of good information about their exit planning options.
Employee Ownership Can Bridge the Gap
Baby boomer business owners can always choose not to plan an exit, but those who do acknowledge may have more choices than the yes-or-no decision of whether to sell. Among the choices are employee ownership models, including selling to an employee stock ownership plan (ESOP). Selling to an ESOP can offer flexibility to the seller that other options can’t, including:
Control over the timing of the seller’s exit. Unlike a third-party sale, selling to an ESOP allows the seller to transition from owner to leadership employee. That can support ongoing success and prevent the sudden loss of key institutional knowledge.
Choice over how much of the business to sell. An ESOP sale doesn’t have to be an all-or-nothing proposition. The seller can choose to sell just a fraction, the entire company, or some percentage in between.
Tax benefits that increase after-tax proceeds. An ESOP sale is always a stock sale, which is more favorable from a tax standpoint than a traditional asset sale.
Sale structure and financing options that can further maximize the sale outcome. In the case of seller-financed transactions, some business owners can even net 90-110% of the fair market sale price for their business.
Consult with an Expert Before Choosing to Sell
The most important factors for business owners to keep in mind are these:
- An exit is inevitable.
- The earlier you start planning, the more choices and control you may have.
You can learn more about the various exit strategy options available and how they stack up in terms of flexibility, supporting future business growth, and even their potential for net proceeds when you download our free eBook, Your Ultimate Guide to Business Exit Strategies. Click the link to claim your copy today.