Where Retirement and M&A Meet

March 25, 2008

One of the benefits of running a group of publications at SourceMedia is that I get to see how various niches within the capital markets interrelate. Lately, there are plenty of links that we’d all prefer not to see, like when reduced appetite on the buy side hurts banks’ ability to sell leveraged loans in the secondary market, which in turn impacts the LBO market and the M&A market as a whole.

For those of us in the financial world, those links are fairly obvious and easy to understand. But one relationship that may be less evident is the one between retirement and M&A. With scores of Baby Boomers approaching retirement, it’s easy to see why the Prudentials and Fidelitys of the world have been developing new products that provide retirement income. But mid-market dealmakers ought to be just as excited.

First and foremost, there are millions of family businesses in the hands of soon-to-retire Boomers. According to the Family Firm Institute, family firms comprise 80-90% of all enterprises in North America, and not all of those folks will be handing the reins to their offspring. Consider these facts from the Family Business Forum at UNC-Asheville:

• Over the next five years, 30% of family-owned firms will experience a change in leadership due to retirement or semi-retirement.
• Twenty five percent of senior generation family business shareholders have not completed any estate planning other than writing a will, 80% want the business to stay in the family, and 20% are not confident of the next generation’s commitment to the business.

Don’t be discouraged by the statistic above that 80% want their business to stay in the family. When push comes to shove, the percentage of businesses that actually remain in the family could be significantly lower, as an increasing number of second and third generation are saying "no" to the emotional drain that often accompanies running a family business.

And therein lies the rub — and the opportunity for many of you. Lots of small business owners will tell you when and how they’re going to retire, and who they’re giving the business to, but the reality is that many of them will end up having to adjust those plans. Some will sell earlier than expected because of health issues, divorce or poor financial planning. A bear stock market only gives them less financial flexibility.

To be sure, the family business market isn’t a new opportunity. Boston-based Heritage Partners, for example, has targeted family businesses for years, and structures family business deals with issues like succession planning and wealth management in mind. Other private equity firms are reaching family businesses as part of their burgeoning cold-call efforts. (I’ve witnessed this first-hand, as my father-in-law receives more and more solicitations — virtually all of them with impersonal, spam-like pitches—from private equity firms interested in his small surgical instruments company.)

For some family businesses, the combination of age, retirement and poor planning will likely result in rushed sales, some of which will undoubtedly prove to be lucrative for the parties involved on the buy side. But ultimately, the best investment opportunities may come from identifying the concerns and retirement expectations for family business sellers heading into a deal and coming up with a structure that meets those expectations.