Wealth managers and financial industry observers have pointed out that we are in the midst of a great wealth transfer driven by Baby Boomers. As Boomers (the generation born between 1946 and 1964) have aged, the savings and investments they worked hard to accumulate are now passing via inheritance to younger generations.
Yet, what happens when a Boomer has owned a business, and the family has no interest in continuing to run that business? Baby Boomers currently own an estimated 2.3 million businesses, and a projected six out of 10 owners plan to sell their businesses by 2030. In addition, 47% of family business owners expecting to retire in five years say that they do not have a successor in mind or in place. It’s estimated that only 30% of family businesses survive the transition from first to second generation ownership.
These trends indicate a significant opportunity for would-be entrepreneurs to explore a chance at business ownership.
What’s Your ETA?
Entrepreneurship Through Acquisition (ETA) is a hot topic among individuals interested in acquiring and operating a business as a career path. Compared with pursuing a traditional career, ETA offers the chance to ‘be your own boss’ without needing an investment of time or money to build a business from the ground up.
If you’re considering exploring ETA and the burgeoning SMB acquisition market, here are some considerations:
- Look for businesses with positive cash flow. Cash flow refers to the net balance of cash moving into and out of a business at any given time. Positive cash flow means that more money is moving into a business than out of it. Positive cash flow – including the means to pay your salary – should be present from day one.
- Identify cash-flow positive businesses with at least $1 million EBITDA. EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) is a metric used to evaluate a company’s operating performance and cash flow. The $1 million mark often signals that a business has been serious about building its value and brand.
- Focus on value proposition. Businesses that provide vital services, such as repair shops, manufacturing, or food preparation may have a more lasting footprint and less risk than trendier businesses.
Does Industry Knowledge Matter?
If you’re thinking about buying an established business, you may be wondering if knowledge of the business’s industry is a prerequisite and if it’s essential that you have some experience with it.
The short answer is, ‘no.’ If you’re purchasing a business that already has a great team of people and solid systems in place, you can focus on building the business as its new owner and let them keep doing what they do best. However, it’s a best practice to create a transition plan with the previous owner that’s clearly communicated to employees so that you maintain their trust and company loyalty.
If you’re interested in business ownership through a merger and acquisition (M&A), a Certified Public Accountant (CPA) like S.J. Gorowitz Accounting & Tax Services is uniquely skilled in capturing every pertinent financial detail and performing the objective due diligence necessary. Having the right business advisory services can keep the deal on track and help you avoid post-transaction surprises. For M&A planning and strategy support, please call 770.740.0797 or email info2@SJGorowitz.com.