'Double whammy' on the business horizon
Baby boomers heading for retirement and the GFC hangover are threatening the value of our businesses.
Thursday, January 19 2012 || Business Link || BY Neil Beaton
A serious hangover from the global financial crisis (GFC) has seen new limitations on access to capital. Businesses, particularly small to medium businesses, are having a hard time growing due to a lack of capital and a subdued economic landscape. Banks are not lending as much as before the GFC and they’re now less willing to lend on cashflow alone. Asking for financial or tangible collateral, such as accounts receivable, inventory and property is common. This has lowered the value of businesses because buyers often require higher levels of funding than they have the collateral to support.
Despite a more positive outlook of late, access to capital may continue to come with tough conditions and what available cashflow there is may be too tight to service loans and invest in expansion.
With little or no capital to invest in their businesses, these companies’ growth is inhibited, and little or no value can be generated. A further complication in this already challenging environment is the looming tsunami of baby boomer business owners who will retire and sell their businesses in the next five years.
Statistics New Zealand projects the population aged 65 years and over will reach 552,000 by the end of this year. The pace of increase is projected to pick up after 2011 when the baby boomer generation begins to enter this age group.
Research shows 20% of New Zealand business owners plan to sell in the next two years. It is estimated that up to 10,000 businesses could change hands over the next five years. With 61% of business shareholders aged over 50 and almost a quarter (23%) over 60, it is clear we have a unique situation on our horizon. A flood of businesses on the market will drive business sale prices down further.
It is inevitable ageing baby boomers will begin to retire in large numbers. It seems selling rather than passing on a family business is the preferred option — just 30% of business owners believe family members are capable of taking over their businesses. Given New Zealand’s changing demographic profile, the pool of potential small and medium-sized business owners will be younger, less experienced and may have a harder time accessing credit. This creates a further set of complications for baby boomer owners — a smaller pool of potential buyers results in lower business valuations, all else being equal.
This situation is unique in New Zealand’s history and its significance should not be underestimated. Business owners need to realise maximum value before this ‘double whammy’ effect takes hold.
Although the current environment may have dampened dreams of the ‘big sell’ and the new yacht, to avoid the full effect of the GFC and the population bubble, owners of small and medium-sized businesses need to begin planning for an eventual sale so they’re not left holding all the cards.
Neil Beaton is a US-based global valuation partner for Grant Thornton
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