Everyone is talking about startups in whatever domain they fancy. But there is an enormous potential unfolding behind the scene. I happened to listen to a podcast of McKinsey & Company research which is very thought provoking.
Sell, close, or continue? The transfer of US businesses is at a crossroads
My observations emanating from the discussions are given below:
Necessity of succession
Many baby boomer entrepreneurs are set to retire in the coming years. That requires new ownership and top management. When there are no ready candidates for takeover those businesses may be up for sale. The good thing is these are viable businesses with proven track record. This throws many opportunities for investors and entrepreneurs.
Heirs of family owned businesses
It is of utmost importance that the successors in family owned businesses need to equip themselves with state of the art skills in management, technology, marketing and most importantly finance. There are opportunities for executive coaching specifically tailored to succession planning, finance for non-finance executives, technology acquaintance programs like those involving artificial intelligence, and in those areas where a skill gap may be felt.
Retiring entrepreneurs with an exit plan
Some businesses would have arrived at the current valuation and future growth plans which would come in handy when negotiating for a win-win takeover. It is highly advisable to get ready with realistic and well analyzed plans for transfer of ownership that would be irresistible for the prospective buyers. It is advisable to give less importance to financial constraints relating to future plans because the investor may have enough resources for an attractive growth plan.
Opportunity for investors and serial entrepreneurs
There would be lucrative opportunities for taking over successful businesses with good risk to reward ratio. This enables decisions based on hard facts versus hypothesis. But these businesses may be too small for private equity like investments. A group of investors may buy many such related businesses on a consortium financing basis and optimize risk while ensuring greater stability. May be we can create Special Purpose Vehicles, Funds or other innovative financial products.
Scale of the potential
According to McKinsey & Company that is close to $5 trillion in potential business value. So just to give a bit of perspective, 52 percent of small and medium-size businesses are owned by individuals who are within ten years of retiring. That’s compared to 35 percent in 2005. This is a real wave of opportunity coming. The study is for the US business but I feel a similar potential exists in many industrialized geographies.
Global opportunity for retiring business persons
Well, the buyers of these businesses are not limited to one country or region. One may sell to any buyer interested in the venture anywhere in the world. A unique opportunity presents itself in such a scenario. Intellectual Property! The retiring owners can license technology or patents and make a recurring revenue after retirement over and above the sale value. Of course this may require some of their time and attention in the future. Nevertheless it is a wonderful opportunity.
Indirect potential
McKinsey & Company’s insights include various collateral benefits like upskilling, leadership, employment and financial services. I think there could be opportunities to create subsidiaries for pooled services in common testing and quality control, marketing, training, liaison and lobbying and the like. This would be imperative because there would be a major modernization and restructuring drive of the industry as a whole catalyzed by infusion of new technology, management and capital.
The best timeline
When does it all start? The early adapters would start the acquisition and integration process in right earnest although they would progress in phases. The FOMO players would follow on. There should be gradual transfer of management without shocks of technology, innovation and culture. This can be phased out over a number of years but the beginning has to be now. Savvy investors may start to look out for immediate opportunities and engage with the entrepreneurs with awesome offers.
Great offer for the retiring entrepreneurs
This wave of business continuity offers great choices to the entrepreneurs to exit the business with better benefits. As said before, they may cash in on their expertise and intellectual property. They can hope to get professional advice for exiting or restructuring. But they need to plan and prepare in advance to make their case.
And for the stakeholders
Acquirers may offer share holdings to stakeholders like vendors, employees and customers at a discount or with other incentives. This would make available to the company their integration and involvement. And of course they can utilize owner financing with staggered payments or other terms. A healthy business atmosphere which inherently updates itself would happen due to the transition taking place.
Look forward to a decade or more of buoyant business mergers, acquisitions and other structuring.