Founder and CEO of Home Alliance.
Let’s be real. The current business climate is challenging. Everything is more expensive. Retreating into your turtle shell to ride the storm out is normal. You might even be convincing yourself that it’s impossible to move forward.
But if you look at history, good and bad times are normal parts of economic cycles. Bad times don’t last forever. And sometimes the best opportunities are found during bad times.
In the past few years, I’ve bought three companies and currently have another 10 in the pipeline. I prefer buying companies over stocks or real estate because I have more control and influence over the outcome. Buying companies isn’t just reserved for huge corporations. In my opinion, “boomer businesses” have the most potential for entrepreneurs. Here’s why buying boomer businesses now can be a smart move to create generational wealth.
Considering The Benner Cycle
After experiencing significant losses during the panic of 1873, Samuel Benner, an Ohio pig farmer, devised a chart that predicted asset price fluctuations. “The Benner Cycle” accurately predicted major stock market events such as the Wall Street Crash, World War II, and the dot-com bubble. And it’s believed that forecaster George Tritch extended the cycle to 2059, adding specific instructions on when to buy and sell stocks.
Not all of Benner’s prophecies came true. But according to the chart, 2023 is a buyer’s market. By 2026, it’s predicted to be a good time to sell.
Boomer Businesses
Baby boomers were born between 1946 and 1964. Research shows that people ages 55-plus make up 21% of the U.S. population but own a disproportionately high 50.9% of small businesses in the U.S.
These businesses are often the bedrock of your local community: restaurants, electrical or plumbing businesses, auto shops and local retail stores.
Advantages Of Buying A Boomer Business
Because a boomer business is well established, it might have assets like intellectual property or an efficient workforce. This can help its long-term potential.
The opportunity for modern innovation is also likely. For example, recent data showed that 86% to 92% of companies still write paper checks for payments.
In 2017, a Wilmington Trust study reported that 58% of privately held businesses don’t have a transition plan for their business. Perhaps their children have zero interest in running a local candy shop when there are other trendy opportunities like TikTok and crypto. And according to a recent Credit Karma survey, 27% of people age 59 or older haven’t saved anything for retirement. These people may need help exiting.
Once you throw in the current state of the economy, all these factors can help give you a better buying price. Attractive financing options to buy the business can be another advantage. I’ve found traditional banks rarely provide funding because of the limited working capital of small businesses.
The Risks
Before acquiring a boomer business, thoroughly assess the risks associated with legacy systems and succession planning.
1. Legacy Systems
Boomer businesses may rely on outdated technologies, processes and management styles that could hinder efficiency and competitiveness. Sometimes, there is no IT system for managing customers. Determine what upgrades are needed, the cost and how long it will take.
Are employees open to learning and adapting to new technologies and practices? Do they need retraining? Or do you need to hire new talent?
2. Succession Planning
As boomer business owners are nearing retirement age, they may not have a well-defined succession plan. This could create leadership vacuums and instability within the business. Retaining key talent during the ownership transition can be challenging, as employees might be uncertain about the company’s future.
To mitigate, work closely with the current owner to develop a clear and well-structured succession plan that ensures a smooth transition of leadership. Are there any legal or contractual obligations related to the transfer of ownership that need to be addressed?
Offer incentives and competitive compensation packages to retain essential employees. Establish open communication with employees to address concerns and provide reassurance during the transition period. It can be as simple as hosting an after-work barbecue.
Conducting due diligence, asking the right questions and developing effective strategies to address these risks can help increase the chances of a successful transition and long-term profitability.
Buying A Boomer Business
Here are a couple strategies you can consider for buying a business.
1. Creating A Search Fund
With a search fund, you can buy a privately held U.S. business with investors’ financial support and expertise. These can include family, friends, high net worth individuals and institutional investors. After searching for and acquiring a suitable company, you would work to grow and improve it to generate returns for your investors.
But this method isn’t always suitable for a regular entrepreneur. The process can take several months to a few years. Your business plan must be solid. You’ll need connections, a track record of success and probably an MBA—or at least a bachelor’s degree.
If that isn’t you, a simpler option is to take advantage of a government-backed loan program.
2. Using An SBA Loan
The U.S. Small Business Administration provides government-backed loans for entrepreneurs to finance a small-business purchase. This option is very popular, with over $44.8 billion in funding in the 2021 fiscal year. These loans may include smaller down payments and longer repayment periods.
After August 1, 2023, you can buy out the business partially. Maybe the owner wants to stay on as CEO. You could keep the owner in place, and buy 50% of the business.
Baby boomers created essential and successful businesses in local communities across America. But the current challenging economic climate, coupled with many boomers looking to retire, gives entrepreneurs a “perfect storm” opportunity to capture a major generational wealth transfer.
The information provided here is not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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