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Tuesday, May 24, 2022

Good News for Baby Boomers

The generation that helped develop the San Fernando Valley is now preparing to retire. The 60- to 70-year-old population in Los Angeles County, which includes the San Fernando Valley, will more than double from about 550,000 to more than 1.2 million by 2030, according to the California Department of Finance. This exceeds the national average for the same age range, which experts say will take about 30 years to double. “Doubling of the older population over the next 20 years means there is little time to prepare,” said Adele Hayutin, a senior research scholar and director of the Global Aging Program at the Stanford Center on Longevity. “Addressing the needs of California’s aging population is increasingly urgent.” This population bulge is felt more severely in the San Fernando Valley, where Daniel Blake, former director of Cal State Northridge’s San Fernando Valley Economic Research Center, said of declining school enrollment following the baby boom generation, “While the same bulge … appears in other areas, it is somewhat more pronounced in the San Fernando Valley relative to Los Angeles County, California, and the U.S.” Of course, for baby boomers themselves, that urgency is personal – how will they prepare and sell businesses they have started, grown and kept alive through depression and recession? There is good news: 2014 is different. Unlike previous years since the recession, this year we should see better first impressions from sellers and stronger willingness to follow through from buyers. First, private equity firms did not spend as much on deals in 2013 as expected. Therefore, they have more cash on hand this year and their investors will want to put that money to work. Also, strategic buyers prefer to acquire profitable competitors for two main reasons: to take them out of the market and reduce competition, and spur faster growth for their own company. Now that the economy is recovering and baby boomers will start putting their businesses on the market, we should see more of these strategic buyers. On the sellers’ side, a better economic environment and the ability to command a higher price should push business owners who held on during the recession to finally decide to enter the market. This recovery and shift in the buyer/seller mentality is recent. For many professionals, 2012 and 2013 were slower than normal. Clients were either not ready to sell or not convinced they could receive maximum value. Consequently, both buyers and sellers took an elongated time to commit and several impediments followed. Buyers were more cautious. Even prior to buyers submitting an Indication of Interest or Letter of Interest, they wanted more information on the seller. Sometimes, this delay allowed them another month or quarter of financial data. At the same time, their delay may have eliminated them from consideration for the highly-sought sellers. Also, private equity groups often took a longer look at the synergies of a seller fitting their platform. With more limited access to debt leverage, this group of buyers became extra cautious and diligent in ensuring their equity flow and returns were properly analyzed. Even though today’s advanced technology allows buyers access to a myriad of seller and market information, it also allows them to request numerous types of analyses from the seller, which actually makes the due diligence process longer than in the past. Buyers have available cash, or access to it, but many have stopped playing in the “blind auction” process anymore. Having survived the last five years making fewer deals, today’s buyers often opt to pass before getting into a bidding war. In their minds, safety outweighs sorry. Consequently, fewer sellers have numerous buyers vying for the same deal. The very best managed firms that are market or industry leaders still sell for premiums, but there is a real dearth of these companies. Many sellers still have financial, customer, and/or management issues, inconsistencies and risks. For the senior lenders who participate in purchases, the diligence is usually conducted at a snail’s pace because lenders have become overly cautious and it takes longer to create documentation to comply with the burdensome regulations. Based upon our experience in the lower middle and middle markets, which includes deals from $10 million to $150 million, buyers will start showing more intent and urgency for the really well-priced transactions this year because of the economic forces changing the market. This year, sellers, particularly baby boomer business owners, will start seriously considering selling—planning and preparing for their exit and not waffling on what they want. There is rarely a strong second chance to make the best impression and maintain the interest of the right buyer, and this year, we should see better first impressions from sellers and stronger willingness to follow through from buyers. Davis Blaine is chairman of the Mentor Group, Inc. and Mentor Securities, LLC, an L.A. investment bank.

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