The Silver Tsunami, or Just a Silver Breeze?

The narrative of a “Silver Tsunami”—millions of baby boomer-owned businesses changing hands—is often touted as a once-in-a-lifetime opportunity for investors. It’s said that these businesses, with no clear succession plan, will flood the market, offering buyers easy deals. But is that really the case?

Many prominent voices in the business-buying community, like Codie Sanchez, have pushed the idea that this is a generational opportunity to buy businesses, often at bargain prices. The theory suggests that baby boomer owners, facing retirement with no succession plan, will be forced to sell. The problem? That narrative, while grounded in some truth, may be overstated. Calling it a "tsunami" is akin to calling a Chihuahua a wolf—yes, they both share a common origin, but their respective impacts are vastly different.

Let’s break down what the data really says about this so-called Silver Tsunami.

The Data Behind the Silver Tsunami

According to the Small Business Administration (SBA), baby boomers currently own around 2.3 million small businesses in the U.S., representing roughly 50% of all businesses in the country. With the majority of baby boomers aged 64 to 80 by 2023, the Exit Planning Institute (EPI) estimates that 4.5 million businesses will need to change hands in the coming years.

Compounding the issue, according to a 2021 report, only 48% of these business owners have a succession plan in place. This implies that over 2 million businesses could be up for sale by 2030. The Federal Reserve’s 2022 Small Business Credit Survey supports this, noting that many aging business owners rely on selling their businesses for retirement income.

Additionally, the transition success rate isn’t promising. Only 30% of businesses make it to the second generation, and a mere 12% transition to the third, raising the stakes for what happens to these businesses if succession plans fail.

But What Kind of Businesses Are We Talking About?

It’s important to recognize the nature of these businesses. Unlike AI-driven tech startups or cutting-edge blockchain companies, many baby boomer-owned businesses are “boring.” They are often in essential, asset-heavy sectors like manufacturing, construction, and logistics. According to IBISWorld's 2022 Industry Report, these industries are less glamorous but necessary, often generating steady cash flow rather than rapid growth.

This gives rise to the assumption that such businesses will flood the market, driving prices down and creating endless acquisition opportunities. The math seems simple—if 4.5 million businesses will change hands and 48% lack succession plans, wouldn’t that leave 2.34 million businesses on the open market?

Not so fast.

The Reality: It's Not a Tsunami

Despite the numbers, the reality is far more nuanced, and the "Silver Tsunami" narrative may be exaggerated. Here’s why:

1. The Non-Employer Factor
   According to the U.S. Census Bureau's 2021 Nonemployer Statistics, the vast majority of businesses—26 million in the U.S.—are classified as non-employer businesses. This means over 80% of companies have only one employee: the owner. These businesses hold little value to external buyers since their success is tied to the owner’s personal skills and relationships. Once the owner retires, the business essentially dies.

   This drastically reduces the pool of businesses up for sale. From 4.5 million, we’re left with around 960,000 businesses that have multiple employees and might be worth acquiring.

2. Size Matters
   Even among employer businesses, many are too small to attract serious buyers. According to the SBA, only 5-10% of businesses have between 20 and 499 employees, with an even smaller subset having over 50 employees. These are the types of businesses that are typically targeted by buyers looking for acquisitions with growth potential.

   This means that, by 2030, the actual number of potential acquisition targets could drop to as low as 230,000 businesses—and that’s before accounting for those that will pass through family succession.

3. Profitability Challenges
   Simply having employees isn’t enough. According to BizBuySell’s 2022 Insight Report, only 20-25% of business listings result in a successful sale. Many businesses, despite having employees and assets, aren’t profitable enough to justify a purchase. Their financials often don’t meet the return expectations of serious buyers.

   Further, a significant number of baby boomer-owned businesses are in sectors like retail and manufacturing, which are highly vulnerable to disruption from globalization, shifting consumer preferences, and automation. It’s tough for small businesses to keep up with industry shifts, especially given the high capital expenditures (capex) required for technological upgrades and automation.

4. Delayed Retirements
   Many baby boomers are choosing to work longer rather than sell. The U.S. Bureau of Labor Statistics (BLS) reports that labor force participation for people aged 65-74 has risen from 20% in 2002 to 27% in 2022. Financial unpreparedness for retirement, combined with the personal attachment many owners have to their businesses, means they’re delaying the decision to sell.

5. Creative Exit Solutions
   When baby boomer business owners do choose to transition, many are opting for Employee Stock Ownership Plans (ESOPs) instead of selling to an outside buyer. NCEO reports show that the number of ESOPs has grown to over 6,000 companies, employing 14 million people. This method allows owners to ensure continuity for their employees and legacy while avoiding a public sale altogether.

The Increasing Competition for Buyers

With fewer businesses on the market than expected, competition among buyers is increasing. Those hoping to scoop up a “cheap deal” may be in for a surprise. There are several types of buyers in this space, and they are becoming more aggressive.

1. Private Equity
   Private equity firms have traditionally dominated the business acquisition space. According to Preqin, there were only 1,500 PE firms globally in 2000. Today, that number has soared to 10,100, with 4,500 in the U.S. alone. More strikingly, private equity assets under management (AUM) have increased from $2.6 trillion in 2010 to $6.3 trillion by 2022 (McKinsey).
   This surge in capital means private equity firms are now exploring smaller deals and paying higher multiples to deploy their vast resources, making competition stiff for smaller buyers.

2. Family Offices
   Family offices, which manage the wealth of ultra-high-net-worth individuals, are also making moves in the acquisition space. In 2008, there were fewer than 1,000 family offices globally (UBS Campden Research). By 2022, there were 12,000 (EY Family Office Guide), and 38% of them are now making direct business acquisitions, according to the UBS Global Family Office Report.

3. Search Funds
   Search funds—investment vehicles that raise capital from investors to acquire and operate businesses—have also exploded in popularity. From fewer than 50 search funds globally in the early 2000s, there are now over 500 active search funds, with capital raised increasing from $250 million in 2010 to $1.4 billion by 2022 (Stanford Graduate School of Business).

4. Strategic Buyers
   Corporations looking for synergistic acquisitions are another major competitor. Deloitte’s 2021 M&A Trends Report found that corporate M&A increased by 15% in 2021, as companies look to acquire businesses that complement their existing operations. Strategic buyers often have an edge because they can integrate their acquisitions quickly, cutting costs and boosting revenues faster than other types of buyers.

Conclusion: The Silver Tsunami or a Silver Breeze?

Is it a "Silver Tsunami" or just a "Silver Breeze"? The reality lies somewhere in between. While there are certainly opportunities to acquire quality businesses as baby boomers retire, the supply of viable targets is far lower than the headline figures suggest.

With fewer businesses on the market and an influx of well-funded buyers like private equity firms, family offices, search funds, and corporations, competition for high-quality acquisitions is fierce. Buyers should be prepared for a challenging environment where deal flow, relationships, and creative solutions are essential to securing good opportunities.

The lesson for investors? Don’t buy into the hype. The "Silver Tsunami" isn’t going to flood the market with endless acquisition deals. Instead, focus on building relationships, understanding the market, and staying competitive.

References;

BizBuySell (2022) Insight Report: 2022 Annual Data. Available at: https://www.bizbuysell.com/news/media/2022/ (Accessed: 9 September 2024).

1. Deloitte (2021) 2021 M&A Trends Report. Available at: https://www2.deloitte.com (Accessed: 9 September 2024).

2. Exit Planning Institute (EPI) (2021) State of Owner Readiness Report. Available at: https://www.exit-planning-institute.org (Accessed: 9 September 2024).

3. IBISWorld (2022) Industry Report: Manufacturing, Construction, and Logistics Sectors. Available at: https://www.ibisworld.com (Accessed: 9 September 2024).

4. McKinsey & Company (2023) Private Markets Review: Global Private Equity AUM Growth. Available at: https://www.mckinsey.com (Accessed: 9 September 2024).

5. National Center for Employee Ownership (NCEO) (2022) Employee Stock Ownership Plans (ESOPs) Report. Available at: https://www.nceo.org (Accessed: 9 September 2024).

6. Preqin (2023) Global Private Equity Report: PE Firm Growth Since 2000. Available at: https://www.preqin.com (Accessed: 9 September 2024).

7. Small Business Administration (SBA) (2021) U.S. Small Business Data. Available at: https://www.sba.gov (Accessed: 9 September 2024).

8. Stanford Graduate School of Business (2022) Search Fund Study: Global Trends and Capital Raised. Available at: https://www.gsb.stanford.edu (Accessed: 9 September 2024).

9. UBS and Campden Research (2022) Global Family Office Report. Available at: https://www.ubs.com (Accessed: 9 September 2024).

10. U.S. Bureau of Labor Statistics (BLS) (2022) Labor Force Participation Report. Available at: https://www.bls.gov (Accessed: 9 September 2024).

11. U.S. Census Bureau (2021) Nonemployer Statistics Report. Available at: https://www.census.gov (Accessed: 9 September 2024).

12. UBS (2023) UBS Global Family Office Report. Available at: https://www.ubs.com (Accessed: 9 September 2024).