‘Silver Tsunami’ Means More Business Acquisition Opportunities

Small businesses are the backbone of our economy, and as CEO of a national nonbank small business lender, I see the evidence every day. According to data from the Small Business Administration (SBA) Office of Advocacy, small businesses employ 47.1% of the workforce in the U.S. —?60.6 million people?— and our team recently worked to preserve small-business jobs during the pandemic by issuing loans through the Paycheck Protection Program (PPP). As that effort draws to a close, I’m seeing a new trend emerge: a surge in business acquisition financing.

Why are so many businesses suddenly changing hands? The simple answer is a passing of the baton from one generation to the next. Figures from the U.S. Census Bureau show that as of 2019 there were?71.6 million baby boomers?in the U.S., the oldest of whom turned 65 in 2011. Since then, Pew Research Center data indicates they’ve retired from the workforce at an average rate of 2 million per year from 2012 through 2019. At the beginning of the pandemic, that pace accelerated, and?3.2 million boomers retired?between Q3 2019 and Q3 2020. In many cases, boomers are retiring from traditional employment, but data also shows this generation owns more businesses than any other.

Due to a?variety of factors?including a greater breadth of work experience, increased access to capital and a more expansive social network, businesses started by older entrepreneurs tend to beat the odds more often than those launched by younger founders. Not surprisingly, Census Bureau data indicates that in 2018,?51% of business owners?in the U.S. were age 55 or older, which means the “silver tsunami” of retiring workers is also bringing a wave of businesses for sale.

These businesses come at an upfront cost, but they could also present valuable long-term opportunities for the right buyers. For younger business owners looking to expand, the time is ripe for strategic acquisitions.

There are a number of advantages to acquiring a company over building an operation from the ground up, and acquisitions can be a relatively straightforward path to growth for savvy business leaders. An acquisition can allow a business to expand into new markets or create more value for existing customers, or it might come with assets such as advanced technologies, additional warehousing space, a well-trained sales force or valuable intellectual property. One other potential benefit of an acquisition? Attractive financing options.

Small businesses often have limited working capital, and financing major investments in vehicles, equipment, technology, real estate and other assets necessary for expansion can be difficult. By comparison, an acquisition can often be financed with as little as 10% down.

In many cases, buyers will look for seller financing, which allows them to bypass working with third-party lenders. But that approach has certain limitations. In particular, sellers will need to do due diligence and look at the buyer’s credit, experience and assets. Even in cases where sellers are willing to make a deal, they’ll rarely finance more than 50% of the sale price, which often leaves a buyer looking at an unrealistic price tag.

Conventional loans are another approach, though banks are typically hesitant to loan without existing assets to serve as collateral. To reduce risk, they’ll look for these assets, excellent credit and a history of success in the industry. These loans may have less paperwork and turn around more quickly than getting a government-backed loan from a bank.

Another option are SBA 7(a) loans. These loans are particularly versatile, allowing for the purchase of businesses, commercial real estate, machinery or materials, and more, and they can be used to refinance existing business debt or provide working capital. With the lower equity requirements of 7(a) loans, buyers can finance as much as 90% of an acquisition. Loan terms range from five to 25 years, and current historically low interest rates make it an attractive time to borrow. Loans are available up to $5 million, allowing small-business buyers to finance significant acquisitions in pursuit of future growth. One potential drawback of a 7(a) loan is the personal guarantee required, which applies to applicants with 20% or more ownership.

In their time leading the workforce, baby boomers have created incredible businesses, many of which have become fixtures in communities across the country. Not all of these owners are going to sell, but the coming decade will likely see a major transfer of business ownership as boomers retire in droves and younger leaders look for opportunities to capitalize. The good news is for those who need financing, there are a variety of options available.

The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.