Reconstructing Avery’s $10.4 Trillion in Business Transfers

blog_mouse_pc_400_clr_2729In an extensively quoted 2006 report titled: “The Ten Trillion Dollar Question: A Philanthropic Gameplan”, Robert Avery, an economist and demographer of Cornell University, allegedly estimated that $10.4 trillion of net worth will be transferred by the year 2040 by baby boomers. He is also quoted as indicating the majority of boomer wealth is held in 12 million privately owned businesses. I say “allegedly” because I have tried in vain to find the report by Avery online. However, that $10.4 trillion aspect of the report is quoted extensively by numerous sources online.

I was hoping to see the details supporting Avery’s estimate. Without finding it, I decided to see if I could reconstruct the details.

My interest lies in educating business owners with up to 49 employees (my definition of small businesses) of the need to plan for the sale of their business. I want to determine the estimated total business value of small businesses in the U.S., assuming all business owners prepare to make their businesses saleable.

So, here’s how I’ve gone about it. First, I obtained the “Private Sector Firms by Employment Size of Firm – 2010” provided by the SBA (http://www.sba.gov/advocacy/849/12162). According to those records, there are almost 4.8 million privately owned businesses with 1-49 employees and only 221,660 businesses with 50 or more employees. In addition, there are about 21.7 million non-employer establishments (think: sole proprietorship with no employees). (http://www.sba.gov/sites/default/files/SBE_2011_2.pdf)

Here’s a table summarizing the data by number of employees.

Private Sector Firms by Employment Size of Firm – 2010

Employment Size of Firm

Number of Firms

Percentage of Total

Cumulative Percentage

Non-employer firms   (think sole proprietorships with no employees)          21,700,000

Not included

NA

1-4

2,810,228

56.0%

56.0%

5-9

993,757

19.8%

75.8%

10-19

615,441

12.3%

88.1%

20-49

375,647

7.5%

95.6%

50-99

117,857

2.3%

97.9%

100-249

66,196

1.3%

99.3%

250-499

19,117

0.4%

99.6%

500-999

8,802

0.2%

99.8%

1,000-2,499

5,397

0.1%

99.9%

2,500-4,999

1,943

0.0%

100.0%

5,000-9,999

1,032

0.0%

100.0%

10,000+

1,316

0.0%

100.0%

Total

5,016,733

100.0%

100.0%

Source: U.S. Small Business Administration, Office of Advocacy, from data provided by the U.S. Census Bureau, Business Dynamics Statistics (www.census.gov/ces/dataproducts/bds/). Non-employer firms source: (http://www.sba.gov/sites/default/files/SBE_2011_2.pdf)

Note that 95.6% of all private sector firms with employees have 49 or fewer employees. If non-employer firms are included in that computation, the percentage becomes 99.2%.

To continue reconstructing Avery’s $10 trillion business value number, I used the above SBA data, then estimated the value of businesses. (My calculation chart is displayed below.) For those under 49 employees, I used the mid-point of the range of number of employees and multiplied that number using a valuation average of $75,000 per employee, then multiplied by the number of firms. The valuation estimate of $75,000/employee was based on the businesses I’ve sold over the years. My business sales ranged from $100,000 to $5,000,000 and averaged about $1,100,000 (excluding real estate sold with businesses). That $75,000 may seem high to some, but I was very selective in the businesses I chose to represent and thus my findings may reflect a slightly higher number than the experience of other brokers. Throughout this article, I am assuming business owners have maximized the salability of their businesses. Under that assumption, I believe the $75,000 business value per employee is reasonable.

For those firms with over 49 employees, I assumed large firms are generally more efficient than small firms, so for those I used an estimated valuation of $100,000 per employee. I also researched that estimate and did find some support. Again I used the mid-point of the range of the number of employees and multiplied by the number of firms.

For the 21.7 million non-employer firms (think sole proprietorships), I’ve used an estimated value of $50,000 per business. That may be a little high, but as previously stated, I’m assuming that small businesses can be sold if the owner properly addresses the obstacles they face by planning for the sale of their businesses.

Before going further, I realize businesses should be valued based on their earnings – seller’s discretionary earnings for smaller businesses and EBITDA for larger businesses. There is no bigger supporter of the need to base valuation on earnings than me. I despise rules of thumb and generalizations (especially overstatement of value) when it comes to business valuations. But, I am taking on a challenging task here, and have to use “back of the envelope” estimates for the data I’m trying to develop.

My goal is to estimate the “potential” business value of all small firms, assuming their owners properly plan for their business exits. In fact, only a small percentage of businesses are saleable because owners fail to even realize the need to plan for a transfer. My estimate of $75,000/employee business valuation may be optimistic, but it assumes businesses are saleable because that’s the number I’m trying to reach.

So, here’s my chart of estimated business valuations for all privately owned U.S. businesses.

Calculating Estimated Business Values for All Private Sector Firms

Number of Firms

Employment Size of Firm

Mid-point of Employee    Range

Estimated Business Value per Employee

Calculated Total Business Value for All Firms in Employee Range

21,700,000

Non-employer firms (think sole proprietorships with no   employees)

NA

$50,000

(see assumptions)

$1.085 trillion

2,810,228

1-4

2.5

$75,000

$527 billion

993,757

5-9

7

$75,000

$522 billion

615,441

10-19

14.5

$75,000

$669 billion

375,647

20-49

34.5

$75,000

$972 billion

TOTAL CALCULATED BUSINESS VALUE – for all firms with under 49 employees, including non-employer firms (based on stated assumptions)

$3.775 trillion

117,857

50-99

74.5

$100,000

$878 billion

66,196

100-249

174.5

$100,000

$1.155 trillion

19,117

250-499

374.5

$100,000

$716 billion

8,802

500-999

749.5

$100,000

$660 billion

5,397

1,000-2,499

1749.5

$100,000

$944 billion

1,943

2,500-4,999

3749.5

$100,000

$729 billion

1,032

5,000-9,999

7499.5

$100,000

$774 billion

1,316

10,000+

10,000

$100,000

$1.316 trillion

TOTAL CALCULATED BUSINESS VALUE – for all firms with 50+ employees (based on stated assumptions)

$7.172 trillion

TOTAL CALCULATED  BUSINESS VALUE – for all private sector firms (based on stated assumptions)   $10.947 trillion

WOW! When I started with this exercise, I was unsure what results my assumptions might yield. Avery estimated that $10.4 trillion of net worth will be transferred by the year 2040 by baby boomers. My calculated estimate shows a total business value of $10.9 trillion for all private sector businesses. So, I’m feeling pretty good about my results.

Most importantly, I found the number I was searching for. The chart above shows the estimated value of small businesses (with 0-49 employees, including non-employer firms) is $3.775 trillion. The implications of that number will be discussed in my next blog posting.

I am very interested in your feedback and comments on the above analysis. What are your thoughts?

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ATTN! Business Owners: Only 25% of businesses ever sell (How can we spread the news?)

figure_with_megaphone_400_clr_2276Attention, can I have your attention please? Business owners, please – your attention, please. Testing 1, 2, 3. Can you hear me? Hello, anybody out there listening? I have an important message to deliver. Please, can I have your attention?

Business owners: whether you can hear me or not, here’s my message:

Only 25% of small businesses ever sell! If you are like the “typical” business owner, you believe that 50-90% of your personal net worth is in the value of your business. But, 75% of you are not going to succeed in monetizing that portion of your net worth!

Now do I have your attention? Hello? Can you hear me? Please – acknowledge by screaming “Yes, I hear you.” (silence)

That’s my message, but nobody is listening – yet.

As I begin to blog, I find myself dreaming. In my previous blog post, I dreamt that President Obama would mention this problem – 75% of small businesses never sell – in his State of the Union Address and eliminate taxation of small business sales. It doesn’t seem like he intends to do that. But what if he changed the wording of his infamous “You didn’t build that” statement? He could say “You think your building value and equity in your business, but are you really? Only 25% of small businesses ever sell! Get some exit planning advice so you can monetize the sweat equity you have poured into your business. We need to save those jobs ….”

How can we reach small business owners with this message? Dreaming again – I’m a sports fan. I believe a lot of small business owners are sports fans. What if all MLB baseball stadium’s outfield fences had signs that read “Only 25% of small businesses ever sell!” What if the ribbon boards in NHL and NBA arenas around the country flashed three to four times a game: “Only 25% of small businesses ever sell!” How about a silent Super Bowl commercial – it only has words on the screen – “Only 25% of small businesses ever sell!”

Back to reality. How can we reach a large number of business owners with this message? More than a year ago, I did a little research using InfoUSA’s query engine. At the time, I was interested in the number of businesses (in certain SIC codes) with 3-49 employees (small businesses by my definition). That count (excluding some SIC codes that were not of interest) was almost 4,000,000 businesses. There were another 2,600,000 with 0-2 employees. How can we effectively reach those business owners with the message: “Only 25% of small businesses ever sell!”

I am soliciting suggestions. You can dream, as I have. Or you can offer suggestions within the realm of reality (such as LinkedIn Groups that might successfully reach business owners with this message.)

Let’s discuss it. Please comment below.

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