How old are your key employees? This is becoming one of the key issues buyers care about when acquiring a business. It’s not a case of agism – buyers would love for your senior employees to stay. It’s about risk and how soon the business’s pivotal people are going to retire.
Right now, 10,000 Baby Boomers turn 65 each day. In 2020, 3.2 million Boomers left the workforce, and this trend is likely to continue. A survey from the New York Federal Reserve suggests nearly half of Americans are likely to retire before 62. The labor force is aging-out, and analysts predict this “demographic drought” is only going to get worse.
When business owners want to retire, they can no longer count on the buyer to find their replacement. If selling the business is your entire exit plan and succession strategy wrapped in one, you could be risking its value. Many buyers want your next wave of leadership tee’d up and ready to go. Because buyers know they may not be able to find those people on their own.
For example, we were recently working with a machine shop in which the business owner and one engineer were the only people handling sales and estimating. The owner was already halfway out the door, and the engineer planned to stay for only about another year.
They do specialized, one-off and low production run jobs, which means estimating is not something that can be readily standardized. Without either of these two people, sales cannot happen. That’s a critical risk, and it’s not something every buyer is willing to take on.
Here’s a bigger example: Wipfli recently conducted a survey of business owners in the construction industry and found that nearly 90% plan to transition ownership in the next 10 years, and half expect to transition in the next five.
This is an industry facing critical talent shortages. According to the National Center for Construction Education & Research, a third of the construction workforce will retire by 2026. That means a shortage on the jobsite and in the C-suite. Those business owners need to start shoring up their succession plans now if they want to retain business value.
There are a large number of family-owned and privately held businesses out there with owners approaching retirement age, and no one ready to take over. The M&A market is booming, but those leadership gaps are keeping some business owners from maximizing their value or even being able to sell their company during these great times.
Now more than ever, leadership and succession planning can protect your business value. However, if you simply don’t have the energy or expertise to add that to your to-do list, there is another option that can help get your business sold at top value: a multi-year transition period.
There are all kinds of ways to structure a deal for owners who intend to stay on – consulting or employment contracts, equity positions, performance incentives. It can be a great way to alleviate the pressures of ownership while taking advantage of growth opportunities using your new partner’s resources.
Buyers want to see a strong management team in place. If you don’t have that, an extended transition gives the buyer assurances that the business can continue to operate as-is for a set period of time. It also gives them a long-lead time to find and cultivate new leadership.
If you’re thinking about exiting in the next five years, talk to your advisors about ramping up your succession plans. As part of those conversations, consult with an M&A advisor and find out all your options for exit – including ways to incentivize key employees with equity positions and how to protect value when you don’t have a successor in place.
For advice on exit planning or selling a business, contact Al Statz, CEO of Exit Strategies Group, Inc., at firstname.lastname@example.org. Exit Strategies Group is a partner in the Cornerstone International Alliance.