14 June, 2011

Private businesses - too big to be bought, too small to be bought

There’s a real problem developing for many private companies whose owners are contemplating exit. They expect that they’ll be able to sell their businesses when they’re ready to retire, but who to?

The NZ Herald noted that 35-45 year olds, who should be the next generation of business owners, are much smaller in number than the baby-boomer generation looking to retire, both because of lower birth rates and because of a higher proportion living overseas. From a survey of companies with turnovers between $5 million and $150 million, the NZH reports that:
  • 59% of medium-sized firms are run by people over 50; 23% are run by people over 60.
  • 63% of owners are concerned about who will take over; 17% have done something about it.
  • 42 per cent of owners had family members working in the business and almost as many (38 per cent) thought they were capable of taking over; but only 24 per cent believed they could afford to.
  • Forty per cent would consider selling to management, but only 18 per cent regarded that as financially feasible.
These stats are probably replicated in many developed countries. They explain why so many business owners (74%) expect their exit will be achieved by a trade sale (i.e. to another business). While many owners would love to sell their businesses to their own teams, the reality is that the virtually no employee can afford to buy an established mid-size business. You don’t make that kind of money working for someone else.

So the obvious solution is to sell to another business. But here’s the next problem. Unless your business is big enough and successful enough to attract the attention of much larger players with the available cash and the potential to do even more with your business than you have, who will want to buy it? Most other similar midsize businesses are not cash rich, and their owners want out too. Well yes, but you’ve had a special relationship with that larger international firm with whom you share big deals and technology - they’ll be sure to want to buy your business. Unfortunately your golden parachute maker either doesn’t have the wherewithal or simply isn’t interested in actually owning your business.

Starting to get the picture? Fortunately, there are some things you can do, and I’ll be exploring them in future writings.

First posted June 23rd, 2008

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