For a long time, building a business came with the assumption that one day you’d hand it over to your kids. It was important for owners to keep the last name in Smith’s Bakery or Jones Bros. Plumbing Repair. Right now, there are over 2.9 million businesses with aging owners getting ready to retire. As it turns out, very few of these (under 15%) are likely to be kept within the family. Roughly 2.5 million will sell to individual buyers, private equity firms, and strategic acquirers. This shift is what you’ve probably heard referred to as the “Silver Tsunami.” It is huge and already reshaping the market. There is a tremendous opportunity here, with these businesses bringing in an estimated 6.5 trillion dollars in revenue per year. However, as with everything else in life, supply and demand are still at play. The best companies have historically been bought up by those with the most resources: PE firms, large corporations, etc. The leftovers are still highly sought after and now PE is playing in the lower-middle market as well, driving up their multiples to unsustainable levels. Buyers are left finding a balance between acquiring the right business and maintaining a reasonable risk level. Here are some things I’ve observed that have resulted in more successful M&A transactions. You’re not special (unless you’re a seller) Given that demand is outpacing supply, the result is a sorting mechanism. Strong businesses with great financials, durable cash flow, and low owner dependency tend to move quickly. They are often absorbed by private equity or larger operators at higher multiples. If you’re an independent buyer looking for one of these businesses, you’re in for a rough time. An old coach of mine loved to tell his athletes that “you’re not special,” and when it comes to search, you’re not. Everybody wants to find the business to buy that has repeatable profit that can become more profitable with technology or offshoring talent. If this is all you’re open to, you’ll either be searching for years without success or end up settling for something you don’t want. If instead you look at what’s left on the open market, you’ll see options that require more work but aren’t necessarily bad. Typically, these businesses will fall into one of two categories: They require operational expertise. The nature of the business (say, an essential service or business dependent on deep sales relationships) could demand an involved owner-operator. The manual lift implied here could be enough to scare away the “big fish” and keep you in the game. Their reputation in the community matters. If an owner’s last name will continue to be attached to their business, the owner may feel compelled to prioritize the right buyer over the highest price. In this case, they could reject cookie-cutter roll-ups in favor of a new owner with a lot of integrity. Three questions to ask as a buyer With this in mind, buyers should ask these three questions as they’re staring down the Silver Tsunami. Can you actually replace the owner? You’ve filtered for businesses that only work because of the owner’s expertise. Now, you need to be honest with yourself to see if you can bridge that gap. Are you ready to roll up your sleeves and learn how to squeegee windows the right way? How well do the numbers hold up under scrutiny? Given how hot the market is, you’re likely to be at risk of overpaying. Dropping $3 million for a business that supports $2 million of value creates an immediate hole. Your net worth will drop by $1 million, and you’ll have to work day and night to get back to where you started. Before getting carried away by the story told by the multiples, you’ll want to do the financial due diligence to know what’s really going on with the business. Do you want to run this business? You may have answered the first question because you’re confident you can clean a window. I’m asking this again to emphasize that you have to want to clean that window. If you don’t love what you do, it’s going to be difficult to find success. Buyers who enjoy the work and the industry tend to handle the friction of new ownership better. Surf’s up for sellers Let’s look at the other end of these deals. If you’re an owner looking to sell, you’re likely feeling pretty good about your prospects. Before you start looking for condos in Florida, I want to share a statistic with you. Roughly 50% of owner exits are not voluntary. Half of business owners have to end things due to one of the 5 D’s: Death, Disability, Divorce, Distress, or Disagreement. Nobody wants to consider these options when things are going well, and I can guarantee you it doesn’t get easier when one of the 5 D’s actually take place. Getting ready to sell is a process that should start years in advance. Just because there is a Silver Tsunami taking place, it doesn’t mean your own individual business is ready to capitalize on the phenomenon. You should start preparing by setting up good processes, reconciling your finances, and building teams that can operate without you in the room. Go on vacation (for the good of the business, of course) and see how well things go when you’re out of the picture. The easier it is for the business to run under new ownership, the easier it is for buyers to part ways with their capital. Staying prepared for the wave We all know the Silver Tsunami is coming. Whether you’re on the buy-side or sell-side of the wave, you should be prepared to capitalize on the multi-trillion-dollar trend. It will bring on some massive opportunities, but only for buyers who understand what they are stepping into and for owners who prepare before the moment arrives. We want you to be prepared when the time comes. By commissioning one of our quality of earnings reports, you’ll be equipped with insights that reveal where there is value (or lack thereof). If you want to learn more, check out our website to set up a call with me.