As they were turning 60, John and Patsy McArthur started planning to sell the business they had founded in 1987, so they could retire, travel and spend more time with their grandchildren.
McArthur Construction Co., at one time, had grown to 60 employees with annual revenue of $15-million. But that was 2008, and the boom suddenly went bust “and it just stopped everything. We kept bidding all the time on new projects, but we had to cut our profit margin to the bone,” Mr. McArthur said.
Since then, buyers haven’t been interested. The McArthurs closed their office in Charlotte, N.C., sold some equipment to cover debt, and cut the staff to 45. Their hope of selling what they spent their lives building became a distant dream.
“It was a very big disappointment when we built this company from scratch. I don’t see much hope we’re going to be able to retire for another four to five years – if we can get anything for what we put our lives into building,” Mr. McArthur said.
The couple is certainly not alone.
“There is an ocean full of entrepreneurs who have aged and are becoming exhausted by years of economic malaise,” said Tom Deans, a Toronto-based speaker and author of Every Family's Business. “It’s been a sobering if not depressing time for business owners who would like to ease back but have had their investments outside of their business eroded, and more importantly the equity in their business has eroded.”
It’s a global phenomenon, Mr. Deans has found in the past year, after giving more than 100 speeches on the topic to business and venture-capital groups worldwide.
“The traditional approach was to give the business to your kids and then you get a salary in your retirement. That model isn’t working, as business owners have smaller families and better educated kids who don’t want to get into the family business. So people in their 60s and 70s are looking around and seeing that there’s no option but to keep going. It’s a crisis like we’ve never seen it before.”
A BMO report in 2009 found that half of Canadian small-business owners planned to retire by 2019. Forty per cent of them had revised their original retirement date and planned to stay in business longer because they hadn’t set enough aside or they had lost equity in the market downturn.
If anything, the situation is worse today, despite the improvement in the economy, said James Wong, vice-president of succession planning for BMO Financial Group,
The author of the small business succession planning book The Transition Experience said he believes selling a small business has become more challenging than it was before the recession, and it’s about to get even more competitive. The wave of boomer entrepreneurs planning to retire in the next 10 years will mean more businesses are for sale at the same time. And the problem is compounded by the fact that “there is a smaller population of potential buyers in the next generation (Gen X) and many of them are more likely to be looking at getting into tech rather than into nuts and bolts,” Mr. Wong explained.
A study this year by Ipsos found a third of U.S. small-business owners said they have no pension or retirement savings and have no idea how they could retire even if they wanted to because sale prices of small businesses remain depressed.
Pre-recession, private businesses would sell for more than five times cash flow. That’s fallen to three to four times cash flow, although that figure has been creeping up in the past year, said Don Sihota a partner with Clark Wilson LLP in Vancouver, who advises on succession and sales of small businesses.
“It comes as a shock to small-business owners to find out that their businesses aren’t worth as much and aren’t as marketable as they thought,” Mr. Sihota has found. But he advises business owners not to wait until there’s a triggering event such as a health issue that forces a sale to make their businesses as attractive and marketable as possible.
Marketability is a particular issue for companies with enterprise values below $30-million, according to business broker Mike Haines, managing partner of M & A Network in Oakville, Ont.. “Retail is the most hard hit and hardest to sell, along with restaurants. No one really wants to get into labour intensive properties that have minimal returns and face risks due to rising transportation costs.”
The majority of buyers who work with Mr. Haines’ company are looking to buy light manufacturing and business-to-business (B2B) services.
He tells owners to work on giving the business more curb appeal before the sale. “I tell owners ‘we need to improve your accounts receivable to speed up cash flow, pay down bank loans and get rid of obsolete equipment, and maybe bring in someone as a manager who can assist you in growing sales to boost their potential appeal of a business to a buyer.’”
You have to reconfigure the business so it runs smoothly without you, he advised. “One of the best measures of a good business is if the owner can go away for three months and the business can still continue to operate smoothly and the customers don’t miss the owner. That’s what a buyer wants to see.”
A strategy that can pay significant dividends is to bring in an investor to give the business a boost, suggested Jacoline Loewen, director of Loewen & Partners Inc., in Toronto. “The advice we give is five to 10 years before you want to sell, bring in private equity, that will buy a portion of the business,” typically about 30 per cent, she said.
“It’s a really good discipline for owners, because many entrepreneurs are used to having everyone agreeing with them because they have all the power. Sole owners also find it hard to believe that someone else would take the business and grow it far beyond what they’re doing currently. An equity owner will ask questions and look for efficiencies and ways to grow the business, Ms. Loewen explained.
“It may be the first time an owner is challenged to quantify their success and go through a comprehensive strategy process, she said. You’d be amazed how few small-business owners have figured out their key performance indicators and what drives the success of the business.”
One new company sees buyouts of small businesses as an opportunity.
“An aging population means a significant number of small and medium-sized companies are owned by entrepreneurs who want to retire and don’t have a manager or family member to hand the business over to,” said Rob Normandeau, president of SeaFort Capital Inc., in Halifax.
Few of the large private equity firms are interested in small businesses, he explained. They have large overhead and because of that they can’t afford to dedicate a lot of time to companies that are earning between $2-million and $10-million in annual income.”
SeaFort plans to buy controlling positions in established profitable small businesses in that value range whose owners are at the age where they plan to retire. “We would also be open to having other partners with equity positions, but they will be someone who brings meaningful expertise to the deal, not just passive investors but people like management partners or someone who brings strategic or practical skills to the table.”
On the day the new venture was announced at the end of March, “we had 20 e-mails about potential investments from business owners approaching us directly and from accounting firms and brokers who have businesses looking for a buyer.”
In the weeks since, response has been growing. “It’s certainly going to keep us busy.”
A correction in a quote from SeaFort Capital president Rob Normandeau has been made from an earlier version.