Baby Boomer Retirement Opens Doors to Deals

We are at the precipice of a historic transfer of wealth.

A retirement wave is arriving, with most baby boomers already hitting 60 or older and many expected to reach retirement age by 2029.

This event could provide big opportunities for private equity (PE). However, those opportunities may look a little different than they did just a few years ago as many business owners grapple with succession planning, inflation, and a potential recession.

According to Term Sheet, “While many VC-backed founders skew younger, PE firms are often buying or investing in businesses owned by baby boomers looking to retire and exit the business.”

Boomers at a Crossroads

There are 72 million baby boomers, according to Advisornews.com. Together, they own 2.34 million small businesses that employ more than 25 million people. CNBC noted that “Many are at a crossroads and need to determine if they will be selling their business or passing it on to a successor.”

Grata found that the “supply of boomer deals is expected to rise” with boomers “reaching retirement and seeking liquidity.” Baby boomers are expected to turn over $14 trillion of business value in the next five years, according to Fortune magazine, although it may happen faster than that due to an eagerness to sell during pandemic-induced business disruption. Maine Pointe, a global supply chain and operations consulting firm, recently described baby boomer retirement as “a significant, sustained opportunity for private equity.” Exactly how big an opportunity remains to be seen.

As Maine Pointe notes, many of these businesses “are debt free with loyal customers and tested and proven business models.” That’s good news for buyers. Still, many are below the threshold in terms of the size that PE investors often prefer. “Many of these companies are simply too small to be on the radar screens or meet the deal criteria of even the smallest of funds,” wrote CNBC. While these companies may not be ripe to be PE platforms, they could make good add-on acquisitions.

Many small businesses up for sale may not operate the way PE investors prefer. “Restructuring the organization, while retaining its key people and retaining customer loyalty, can be a challenge,” as Maine Pointe puts it, noting “founders often find it difficult to relinquish companies they’ve spent a lifetime building.” That can lead to risk, as well as reward, for acquirers seeking to improve efficiency.

No Succession Plan…No Problem?

A Wilmington Trust survey found more than 58% of small business owners have no transition or succession plan. That can open the door to PE deals, or simply delay any change. Owners often enjoy running their business and are in denial about the passage of time. And some family members struggle to let go, delaying sales for economic or emotional reasons. Seemingly intractable inflation, interest rate hikes, the war in Ukraine, supply chain shortages, and a tight hiring market can all throw roadblocks in the way of deals. But a changing of the guard creates opportunities, even if they are further down the road.

“As baby boomers retire, Main Street could face a tsunami of change,” is how CNBC.com puts it. Many business owners’ net worth depends on their family business, so anything that hurts their business hurts their retirement. That could push deals further back as well. And PE isn’t the only sector eagerly eyeing deals from retiring baby boomers. Companies considering management buyouts, employee stock ownership plans, and other would-be acquirers are all waiting in the wings.

Exactly when owners will retire and sell isn’t always clear, but it seems inevitable that PE will play a big role in the next chapter for many companies (although perhaps not necessarily the smallest). A wave that includes a massive transfer of wealth has begun to break. In some cases, PE will watch, but in others, you can expect investors and funds to dive in and get deals done as baby boomers sell and private equity firms get involved in the next Big Boom.