There's An Elephant In The Room!

We have all experienced the “elephant in the room”: the big problem in the corner no one wants to talk about because it’s way too complicated or difficult. Everyone just hopes it will go away.

There is another sort of elephant in the room though, a far more insidious one, the “invisible elephant”: the big problem no-one has properly identified.

We have a big invisible elephant issue looming in the private business sector. It’s called the “baby boomer business exit tsunami”.

Here are the scary facts:

1. Up to 80% of private businesses in developed economies are owned by baby boomers. The Australian private business sector is estimated to be worth well in excess of $1.5 trillion, so baby boomer business owners currently own businesses collectively worth hundreds of billions of dollars.
2. The last of the baby boomers turned 50 last year, so the baby boomer generation is well and truly heading towards retirement. Most baby boomer business owners plan to exit their business over the next 10 to 15 years.
3. Fewer private business owners are planning to pass their business on to the next generation. In 2012, 38% planned to do so. It’s now dropped below 25%.
4. More than 70% of private business owners have no business exit or succession plan.
5. Most private business owners aren’t exit ready (ie their business isn’t in good enough shape to sell, even if they did receive an unexpected offer from a potential purchaser).
6. Anecdotal feedback from business brokers suggests that, at best, only three to four businesses in 10 they see are in a condition to be sold.
7. Good business exits and succession arrangements take far longer to complete than most business owners realize (often a number of years).

While time will tell exactly how the baby boomer business exit tsunami plays itself out, it’s likely to look something like this:

• As baby boomer business owners reach retirement age and look to exit their businesses, it will lead to many more businesses hitting the market place than usual in a relatively short period of time.
• The number of businesses being passed to the next generation has been steadily declining for some time.  Fewer children are interested in taking over family businesses; those who are entrepreneurially minded often prefer to start their own.
• The flow on consequence is more buyers will be required to buy the increased number of businesses available for purchase.  It’s unlikely there will be sufficient buyers at various times to satisfy the level of selling demand.
• As a result, many private business owners will be faced with the prospect of selling their business for a substantially lower amount than they want or, in many cases, won’t be able to sell their business at all.

If you’re a baby boomer business owner, the above scenario looks pretty bleak. However, the baby boomer business exit tsunami also has much wider implications.

The private business sector is often rightly described as the “engine‑room of our economy”. As the Turnbull government’s recent Innovation Statement highlighted, it is critical for Australia to ensure our businesses are, and continue to be, competitive, innovative and efficient to ensure we have a productive and resilient economy.

If the factors leading to the baby boomer business exit tsunami are not adequately addressed, it will inevitably have significant implications for Australian business and the Australian community generally.

In particular, it’s likely to lead to a higher level of businesses closing or failing than would normally be the case.  This will inevitably lead to:

1. job losses;
2. a lessening of competition in various markets;
3. the loss of innovation associated with failed or closed businesses;
4. the inability of many private business owners to adequately fund their retirements (which will effectively move the financial burden back to government);
5. a decline in key services in some sectors (such as professional advisory and health services, in which a disproportionately high level of smaller businesses are owned by baby boomers); and
6. a decline in a range of business sectors in rural and regional areas (where again, many smaller businesses are owned by baby boomers).

So, surely government is across the baby boomer business exit tsunami issue and are looking at ways to deal with it? Well, actually, they’re not.

Apart from a handful of good private sector research projects on the issue, and in contrast to developments overseas, there has been little attention paid to the baby boomer business exit tsunami in Australia.

There was an excellent opportunity for the issue to be comprehensively examined in the Productivity Commission’s somewhat oddly titled Inquiry into Business Set-up, Transfer and Closure. The Inquiry, announced in late 2104 by then Treasurer, Joe Hockey, and then Minister for Small Business, Bruce Billson, was aimed at improving “Australia’s productivity performance by encouraging entrepreneurship, innovation and increased efficiency of Australian business” and “giving small business every opportunity to build upon their role as the engine-room of the Australian economy”.

Given the importance to the Australian economy and society generally of transferring ownership of baby boomer businesses to new ownership in an effective way, it seems odd that the Commission paid so little attention to the issue in its large final Inquiry report. Even more strangely, the Commission virtually made only one, quite vague, recommendation on the issue of business transfer. In essence, the Commission said business exits were largely a commercial matter and government should, at most, only provide general guidelines on business exits to the market place.

A significant opportunity to consider the issue at a government level appears to have been lost. If the factors leading to the baby boomer business exit tsunami are not adequately addressed, it’s likely to put a solid dent in Australia’s aspirations to be an agile, innovative and competitive economy.