Owners who are thinking about an eventual transition from their privately-held business are well served in understanding the optimal timing for that exit transaction. Whether an owner is thinking about passing the business to insiders or selling the business to a financial group or a strategic buyer, timing matters because the economy moves in cycles. The economic cycle that drives business behavior and performance will also, in all likelihood, have a substantial impact on an owner’s exit. This newsletter is written to provide an update on a decade-old chart and concept that helps owners predict and plan for the timing of their optimal exit.
Introduction to the Transfer Chart
Rob Slee, in 2004, introduced the U.S. Ten Year Private Transfer Cycle chart through his book, Private Capital Markets.
In short, this chart predicts that every ten years or so, the transfer cycle (which matches the economic cycle) repeats itself, providing good and bad times to exit a business. If this is true for the current decade, then business owners may want to consider that by 2018, the window to transfer or exit your business may close in a manner similar to the way that it did in 2008.
Where We Are in the 2010-decade Cycle
To summarize the cycle that we are currently in, we begin with a review of 2008 and the last financial market decline. Similar to prior cycles, the market decline started towards the end of the last decade. However, unlike prior decades, the 2008 economic drop was a once-in-a-generation type of collapse of the world financial markets. The timing of the last drop was predictable. However, what was less predictable was the severity of the decline.
The 2013 Turn and 2014 Recovery
So, following past cycles, we are seeing that the market/economy started showing serious improvement in 2013, and through 2014 has stabilized. Much of this improvement can be traced by the performance of the stock market for publicly-traded companies. The stock markets are a ‘leading indicator’ for the economy and, with the Dow Jones Industrial Average reaching historic highs of nearly 18,000, it seems as though the recovery has taken full hold.
Impact for the Baby Boomer Owners
The baby boomer generation includes those born between 1946 and 1964. So, the leading boomers are turning 69 in 2015. And, a majority of privately-held businesses in the US today are owned by baby boomer owners. So, if the next cycle for business transfers turns again in approximately 2018, then these same boomers will be 72 years old at that time. And, if the cycle repeats itself in a manner similar to prior decades, the market will turn downward in 2018 and perhaps not recover until 2023. At that point in time, these leading boomers will be 77 years old before the next real opportunity exists to exit the business.
Therefore, the question that you need to ask yourself, whether you are 68 years old or 38 years old is whether or not you want to be holding on to your business through the next recession. And, how will the large number of selling owners impact your ability to find a buyer? If you decide that you want to reduce your overall risk and diversify yourself, the next few years may be ideal in terms of timing.
Additional Timing Factor
A business exit does not happen right away. In fact, it can take a year (or more) to execute an effective transaction to either insiders or to outside parties. Therefore, if the evidence in this newsletter is persuasive to you, it may be wise to begin planning your exit prior to 2017. Or, more accurately stated, you may want to begin to plan your exit today.
Warning – Past Performance Does Not Guarantee Future Results
While past trends certainly help to predict the future, they surely don’t guarantee what will happen. The relevant question, however, is not whether or not you can properly time the markets because those forces are outside of your control. The better question to ask yourself is ‘which factors are within my control today that can materially improve my situation?’ You are likely to answer this question by simply realizing that your own actions are within your control and there is just as much, if not more risk in doing nothing as there is in taking proactive steps to exit your business and protect your wealth.
Exiting a business is a process, not an event. And, our past can be used to teach us lessons about the future. This newsletter was written with the intention of assisting owners like yourself with being properly prepared for a successful exit and to factor the timing of your exit into your decision-making process.
Pinnacle Equity Solutions © 2014
Frank Mancieri, Chief Growth Advisor, 401-651-1585, frank@gtGrowth.com