By

The litany of problems the Baby Boomer generation will face in retirement is familiar– Social Security, health care and long term care. Now, some advisors say, boomer business owners should add something else to that list: a potential liquidity problem for those owners who have not yet developed an adequate succession plan.

According to Guy Baker, managing director of BMI Consulting in Newport Beach Calif., one basic economic principle that impacts the sale price of a business–and anything else for that matter–is the concept of supply and demand. The more buyers in the market, the higher the asking price, while fewer buyers result in a lower asking price.

Boomer business owners headed toward retirement will all be looking to sell their businesses at the same time, Baker explains. “Theres going to be an oversupply of businesses on the market and a low demand for people to buy them. If theyre a prime candidate for an outside buyer, where [is that buyer] going to come from?”

Baker adds that, rather than continuing to invest new dollars in their businesses, these boomer business owners need to start thinking about stabilizing the value of their business and finding a buyer.

Other advisors, however, feel that this “oversupply problem” will not be the case. “My business owner clients take nice trips, they play golf when they want to, they go to shows, they go to events, they do things, theyre there for their grandchildren–why retire?” asks Herbert K. Daroff of Baystate Financial Services in Boston, Mass.

Daroff says many of his boomer business owner clients have never had the expectation to retire, and William Keen agrees.

“One of the things I think well see is people are going to continue to work longer,” says Keen, principal of Professional Benefit Services, Fairfax, Va.

Keen adds that with people working longer, the number of boomers looking to get out of their businesses at the same time will be spread out. “The game is shifting a bit in terms of timelines. Were no longer a society that says when you hit age 65, you retire.”

In fact, the biggest issue Daroffs boomer business-owner clients are concerned with is how they will pay for their health care. “Theyve set aside retirement funds, but theyre concerned about whos going to take care of their health care costs in the future,” he says.

Whether or not the wave of boomers approaching retirement impacts the liquidity of their businesses remains to be seen, but this same supply and demand problem is hitting businesses in many parts of rural America today.

Timothy OConnor, a planner with OConnor and Associates in Grand Island, Neb., notes that the erosion of the population in his area has made the search for successors a difficult one. According to OConnor, 20 years ago the average family farm was about 600 acres, now its over 3,000. “You have fewer farm families out here. Some of these guys would like to get out, but they dont have a buyer,” he says.

The solution for his clients in this situation is to “Grow your own successor,” he says.

OConnor explains these clients need to look for someone they would feel comfortable with handling their business and who would be willing and able to take over. This means that a big part of any business succession plan is taking care of key employees. “So, part of your succession plan is key person,” he says.

Key employee planning in these situations is extremely important because “key employees are loyal to the owner, theyre not loyal to the business,” Daroff adds.

And while he estimates that these key employee successors can be found internally 75%-80% of the time, those businesses that dont have a good potential successor can have a difficult time finding one.

For Robert Sunshine of Sagemark Consulting in Irvine, Calif., one place some of his clients have found potential successors is at the business owners own trade association meetings.

“One of the things associations can do is expand the business owners contacts–maybe there are some opportunities with another person in that industry who he can build a succession plan with,” says Sunshine.

Keen adds that sometimes the best place to find a successor is through the businesss friendly competitors. “Its a lot easier to do that during that individuals lifetime than at his death,” he says.

But Sunshine cautions his clients to be careful when looking for a buyer since some competitors may try to use this information against them. “You dont want to run an ad in the trade journal. Youve got to build those relationships,” he says.

For those businesses that will not be sold to provide a secure retirement, there is still a great deal of planning that needs to be done in the event of the owners death or disability.

Tying up loose ends in these cases involves more than the proper estate planning and liquidation of business assets. For many of Sunshines clients, “there might be jobs still in progress.” He adds that when working with business owners in the construction business, its not uncommon for a contract job to be going on for months, and sometimes years, after an owners death.

In these instances, a strategy Sunshine employs is to keep a key employee on board after the owners death to close down the business to the satisfaction of the widow, the management staff and the owners advisors. “For example, well contractually pay a bonus of $100,000 over and above your salary once this is satisfactorily completed,” he says.


Reproduced from National Underwriter Edition, February 10, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.