The California Association of Business Brokers indicates that Baby Boomers own more than 12 million small businesses in America. Over the next 10-15 years, many of these businesses will need to transition to the next generation or to a new owner as Baby Boomers look to retire. If one assumes the long end of the 10-15 year range, this means that 800,000 businesses will transition each year for the next 15 years. For further context, according to BizBuySell, only 9,093 businesses were sold in 2023. Increasing from 9,093 to 800,000 businesses selling annually is an astounding 8697.98% increase. The question is how much capital is available to support these transitions?
Historically, buyers are key management personnel, wealthy individuals, families, groups, or private equity firms. As of December 1st, 2023, there was a record $2.59 trillion in cash held by private equity firms globally. In 2022, that number was $2.237 trillion. Despite an unprecedented amount of capital available, deal activity in 2022 & 2023 remained sharply down from its peak deal value in 2021 of $2.130 trillion. In 2023, the overall value of private equity transactions declined even further from $1.4 trillion in 2022 to $776 billion. As mentioned earlier, there are various options outside of private equity firms when it comes the sale of a business. While the private equity capital pool expands, family wealth offices are growing in popularity also.
A family wealth office is a privately held entity that manages the financial affairs of wealthy families. In general, these offices have over $50 million in investable assets. An extreme example is Walton Enterprises, the family office of the late Wal-Mart founder Sam Walton, whose heirs have a combined wealth of $224 billion. A recent survey by CNBC indicates that there are approximately 144 family wealth offices in North America, averaging $1.3 billion per office; this totals to $187.2 billion in wealth available to purchase businesses. When you combine the dry powder of private equity firms and family wealth offices, it appears to present an ample amount of capital to support the exiting business owners; however, there is a catch.
The firms and offices mentioned above tend to target acquisition deals with minimum price tags of $100 million. Additional headwinds to sellers include higher interest rates, which require higher rates of return for buyers (translating to a lower price for sellers) and robust due diligence process requirements of buyers. It will be hard to ascertain the amount of capital that will trickle down to lower middle market, Baby Boomer owned firms. In the near term, private equity sized transactions between sellers and buyers appear to have the funding available to support a balanced market; however, as more businesses become available for sale, the funding environment could change quickly. Given the volume of businesses looking to exit, a change in funding availability would likely favor buyers more than sellers.
Written by Aaron Schaffer
Chief Banking Officer at Community State Bank
aarons@csbemail.com
260.994.0450
March, 2024
Chief Banking Officer at Community State Bank
aarons@csbemail.com
260.994.0450
March, 2024