As the baby boomer generation approaches retirement age, baby boomer business owners are struggling to determine if they can afford to retire. Small businesses employ 47.1% of private sector employees, or approximately 60.6 million employees, according to the Small Business Association. With boomers owning 60% of small businesses and limited retirement options, the nation sits on a precipice of economic crisis. So, why can't baby boomer business owners retire, what problems will that cause, and what can be done to fix it?
Why can't baby boomer business owners retire?
To begin, let's look at how much a business owner is likely to earn by selling their business. 94% of businesses have annual revenues less than $5M, so we'll look at the best-case scenario:
- An average $5M business has EBITDA (profit) of $500k.
- An average $500k profit business sells for 3-5x multiple on EBITDA.
- Assuming 4x $500k, the average sale value is $2M.
- The net sale value after taxes and cost of transaction (about 45%) is $1.1M.
- The average business owner is $200k in debt.
- After paying off debt, the business owner is left with $900k.
$900k doesn't sound so bad. But the now-retired boomers still have to pay for their new life:
- The average baby boomer is 65 years old.
- Median retirement age in America is 79 years old.
- Most business owners that run a $5M business make $75-150k per year.
- The newly retired boomer now has $900k to last for about 15 years, or $60k per year.
Assuming a $100k income lifestyle, will the former business owners be able to adjust to $60k per year? Selling your business and retiring doesn't seem very attractive if you have to plan on living with just over half your previous annual income. Also, all of this depends not only on finding a buyer to sell to (probably only 20% chance), but also selling the business in an all-cash deal (almost never). This will be particularly difficult if boomers flood the market trying to sell their businesses. Additionally, this is all before Covid, so imagine the difficulties they are facing now. And this is best case scenario - only 6% of businesses reach that $5M starting point.
What problems will that cause?
With baby boomer business owners unable or unwilling to retire, a national economic crisis may unfold as they continue to run their business in perpetuity. This crisis will present in the form of three main problems:
1.Lack of space for new businesses, stifling innovation. An economy thrives with the rotation between the new and the old. If old businesses do not close, it creates a bottleneck for new businesses to gain access to markets, real estate, and other infrastructure required for new businesses to grow and thrive.
2.Record small business closures. If boomers can't find a buyer or someone they can pass the business on to, these small businesses will likely close. This will cause mass unemployment and a ripple effect throughout the banking system and tax basis of federal and local governments.
3.Increased pressure on senior citizen welfare programs. Baby boomer business owners could also sell their businesses for pennies on the dollar, squeezing them of their nest egg for a sustained retirement, and increasing pressure on the Medicaid, Social Security, and other senior citizen government programs.
What can be done?
Because boomers are rapidly approaching retirement age, it is vital that baby boomer business owners start planning their exit immediately. Even if these business owners plan on continuing to run their businesses, a succession plan, whether it be passing the business on to a family member or selling it, will allow them to run the business more effectively and exit smoothly when they choose to do so. This is particularly important given that the majority of business owners' net worth is often illiquid, tied up in their companies. The process of preparing an exit strategy, be it sale or succession, is one that has to be managed over a period of time, and one that can be navigated with the help of a qualified advisory team. The first step is meeting with a local business broker, wealth management advisors, and estate planning attorneys to help plan their retirement and exit.