Contrary to perceptions that the retirement of the Baby Boomers will exacerbate supply/demand imbalances in the market for buyers of privately-owned businesses, market trends in the United States are revealing a diamterically-opposed reality. According to research conducted by Basil Peters, Principal of Strategic Exits Corp – both empirical and anecdotal in nature – Boomers are emerging as a significant buyer category. Whilst similar research has not as yet (as far as I know) been conducted in Australia, the similarities in culture, economic development and demographics suggest a likelihood of similar developments.
Conventional wisdom – mine included – has suggested the BB generation retirement event having almost catastrophic consequences for owners of privately-held businesses seeking an exit some time this decade. Moving out of the workforce and liquidating private business interests was supposed to create a scenario whereby a surplus number of businesses for sale were to compete harder for a diminishing buyer pool. Apparently, the wealthiest generation in human history were to retire from working life completely and hit the golf course and cruise liners to live out their golden years exploring the joys of life on offer.
Interestingly, Peters’ research uncovers some startling trends amongst the Boomer generation. For starters, the concept of retiring completely from working life at 65 isn’t as arbitrary as it might have been for their parents’ generation. Wealthy Boomers are quickly realising that 18 holes a day is not as satisfying or stimulating as the challenge of building or fixing a business, sitting on a Board or investing in fun start-ups. They are living longer and can expect another 10-20 years past this age benchmark, and many quickly remember how much fun they had building and running companies. It is a difficult vice on which to go cold turkey.
Peters estimates that the quantum of Boomer wealth potentially available to private enterprises as buyout or investment targets is in the vicinity of $8 billion in North America alone, and the proportion flowing into private company investments or takeovers is small but growing quickly. Private business is becoming more appealing as debt and equity portfolios fail to deliver expected returns.
So how visible is this available wealth? This source of capital in Australia is most commonly seen in the category of Angel Investors and Family Offices (investment funds representing wealthy families, a growing and more prominent investor class for private enterprises). The Australian Association of Angel Investors (AAAI) National Angel Survey found that $1 billion was invested in emerging businesses in 2010 alone.
So what does this mean for business owners seeking capital? For a start, the BB set are, according to Peters’ research, playing in the space shunned by PE funds (i.e. less than $20 million), not available to Venture Capital (although US VCs have apparently been making inroads of late, which might not go down to well with fund investors) and above the active business owner/operator (sub-$1 million). They compete head-on with trade/corporate buyers and investors in this mid-market category, but have greater flexibility in the range of financing options available, and the speed to match. For example, whilst a trade buyer is purely focused on acquisitions or strategic stakes, Angels and Family Offices can look at equity investments, buyouts, debt financing and (d) all of the above. They entertain both passive and active involvement in a business, and in the latter often have decades of experience to bring to bear, which should bode well for investee companies. With the global banking malaise firmly in mind, they also represent a realistic alternative to traditional lenders of first resort, the Big 4 banks.
Accessing BB investors, however, is not a simple task. Entrepreneurs need to produce detailed business plans with clear ROI expectations, application of funds and the type of financing required. They then need to intelligently navigate the invariably clandestine (at the risk of sounding melodramatic) world of private financiers, who are less likely to hang out their shingles or organise into a public collective than corporate or PE buyers. Connecting with advisors linked in to such investors has a higher probability of success than trying to enter the network through the proverbial front door. This really is no different than the process of finding an exit through more traditional channels, albeit with a greater emphasis on networking for introductions.
The most important lesson for business owners and advisors alike is that there are, in Peters’ words, “so many more buyers than sellers” in the sub-$20 million range in North America, all competing for a limited number of opportunities. So with all of the negative press, wailing and gnashing of teeth about the lack of available finance in today’s market, perhaps the Baby Boomers will not actually be the harbingers of doom for so many aspiring vendors as recent speculation would suggest. They may, conversely, end up being the White Knights of the M&A world.