More small business owners are selling
And it’s a shock when their living expenses aren’t part of business
Business owners may not realize it, but a whole lot of their home lives — and expenses — are often tied up in their stores, companies or whatever type of business they’ve been running.
They can write off the dinner check and use the company car for taking children to soccer practice and rely on health insurance coverage paid for by the company and so on. “Their life is the company. So, a lot of what they do is company-related expenses,” John Waldron, founder and CEO of Waldron Private Wealth in Bridgeville.
Then, when they sell the business, they can be in for a shock.
“We had one situation where one of our clients — a business owner — thought their cost of living was $500,000 a year. When we did the forensic accounting analysis to see what it actually costs for them to have the same standard of living, it was about $2.5 million,” Mr. Waldron said. “So that was an eye-opener.” A record number of small businesses changed hands in 2017, up 27 percent from 2016 and the largest increase since 2013, according to a recent report by BizBuySell.com, an online listing of business buying and selling opportunities based in San Francisco.
The pace of sales of small businesses in Pennsylvania and across the nation appears to be on track to continue or even increase in 2018, according to Tom Kerchner, managing director of Philadelphiabased BMI Mergers & Acquistions.
“We’re seeing a big uptick in volume this year with baby boomers calling us to say they are ready to sell their businesses,” Mr.
Kerchner said.
“The economy is good. They are getting older. They have recovered from the last recession and the market is good for selling now with interest rates still good, banks lending and lots of private equity money available.
Based on the Small Business Administration’s report of 999,591 small businesses currently operating in Pennsylvania, Mr. Kerchner estimates the value of those businesses to be about $144 billion. He said about 599,000 valued at about $86 billion could be changing hands over the next decade as more babyboomers retire.
“Our estimate and others is that about 60 percent of business owners are baby boomers,” Mr. Kerchner said. “Some of these will stay in the families and some will be sold. About 40 percent are under $500,000 in annual revenue and some of these may not sell and will close.”
The stakes are much higher when selling a privately held business compared to selling a publicly traded stock.
Advisers at Waldron Private Wealth cater to an unusual niche in the financial services industry because they recommend investmentsin stocks and bonds for clients, but they specialize in advising business owners on the complexities involved in managingcompanies.
The firm has 160 clients across the country, some of whom have a net worth of billions of dollars. It is not uncommon for Waldron clients to own a business worth millions, yet have no money invested in stocks and bonds.
“Having money to invest is not a requirement for us to engage a client.,” said Matt Helfrich, president of Waldron Wealth Management. “If a client has a business, the firm will consult with them onrunning their business.”
After the sale of a business, Waldron advisers help former business owners choose investments for a stocks and bond portfolio and also cope with the soft issues their clients will need to think about, such as the emotional impact of selling a company they may have devoted their lives to.
It can be a tough transition.
“In their business, they felt more in control because they could pull levers, cut expenses and do whatever if a recession came or the economic times were more rough,” Mr. Waldron said. “They feel they have no control in the stock market. That volatility and the lack of control in that volatility gives them a lot more fear.
“They didn’t see the value of their company go up and down every day,” he said. “Now, in a stock and bond portfolio, they see that every day and they are not used to it. One of our biggest challenges is to prepare them for the emotional reality of what they are about to step into. “