Baby Boomer Small Business Selloff

There are approximately 2.34 million small businesses owned by baby boomers, accounting for about 40% of all small businesses in the US. So, with over 10,000 baby boomers reaching retirement age every day, there is a generational shift leading to a wave of business sales and transitions. In fact, a recent survey by BizBuySell indicates that 58% of baby boomer business owners plan to sell their businesses within the next few years.

This presents an opportunity for younger generations to step in and purchase established businesses with loyal customer bases. This article will look at the pros and cons of doing so.

A recent survey by BizBuySell indicates that 58% of baby boomer business owners plan to sell their businesses within the next few years.

Entrepreneurship Through Acquisition

But first, let’s take a look at the process of purchasing an established business, often referred to as entrepreneurship through acquisition, or ETA.

ETA is a model where aspiring entrepreneurs purchase an existing business rather than starting a new one from scratch. This process allows the buyer of the business to hit the ground running with a business that already has a revenue stream and operational structure. In short, the existing customers and cash flow of these businesses make them less risky investments than new ventures.

To execute this acquisition potential buyers will need to do the following:

• Identify a purchase target: Many of the baby boomer-owned businesses have stable operations and proven track records. More so, these owners are motivated to sell, as they look to transition into retirement. Being motivated also means that these baby boomers may be more willing to work with buyers on flexible terms, such as owner financing or transitional support.

• Perform due diligence: After a business is identified, the aspiring entrepreneur should analyze the company’s financial health, operations, and potential risks. This process involves a detailed review of the business’s records and performance to confirm that the seller’s claims are accurate and that the business is a good investment.

• Secure funding: Buyers will have to explore their options for financing the acquisition. Options include personal funds, bank loans, SBA loans, private equity, or seller financing (where the seller agrees to finance part of the purchase price). Again, in the midst of the baby boomer sell off, the latter option is becoming more common.

• Finalize the purchase: This is the final step in the process, where the ownership transitions from the buyer to the seller. It’s also the stage where the outgoing owner may provide transitional training or support.

What To Consider Before Purchasing An Existing Business

Now, let's explore the benefits and drawbacks of entrepreneurship through acquisition, specifically in the case of purchasing a business from a baby boomer.

Pros

We’ve already touched on things like existing customer bases, revenue streams, and operational structure. Here are a few more benefits of buying an existing small business:

• Supplier and vendor relationships: Established businesses typically have existing relationships with suppliers and vendors, ensuring reliable inventory and favorable terms.

• Operational financing: Part of buying a business that’s already generating revenue means you’ll have cash flow from the outset. The other part is that having a history of profitability will make it easier for the incoming entrepreneur to secure any additional funding they may need.

• Untapped growth potential: Buying an existing business that is already operational means the entrepreneur can focus on expanding the business by introducing new products, services, or markets that the previous owner didn’t pursue. For example, the previous owner may not have adopted the latest technology or digital marketing strategies. This presents another opportunity for the new owner to scale the business.

Cons

While often deemed less risky, entrepreneurship through acquisition does come with its own set of challenges. Let’s take a look at what those are:

• Outdated systems: This is the other side of the untapped growth potential. Part of upgrading the business’s technology might include updating outdated technology or processes, which could require significant investments in order to modernize.

• Declining markets: When the business started, the demand for the business’s service or product was likely different than it is today. As such, a potential drawback to purchasing an established business is purchasing one that hasn’t kept up with changing market demands, or is in an industry that is in decline.

• Customer relationships: While there’s upside to buying a business with an existing customer base, not all customers will remain loyal to new owners, especially if their loyalty to the previous owner was based on a personal connection to them.

To Buy, or Not To Buy

So, the opportunity is there, but that doesn’t mean that buying a baby boomer’s business will make sense for you. Before doing so, consider the pros and cons outlined above. While there may be immediate cash flow, an established customer base, and opportunities for growth, there may also be outdated infrastructure, market challenges, and transition issues.