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Baby Boomers Businesses

Baby Boomers Businesses

Baby Boomers Businesses a Matter of Scale

Baby boomer businesses, or more precisely, their owners, bookend one extreme of the Australian demography. At the other end, we have a birth rate per woman that is below replacement levels.

This simple set of facts feeds into many ongoing debates from the desired level of immigration, to how fit for purpose our tax system is to accommodate the increasing pressure being placed on a smaller working-age population compared to the non-working population.

It also has an impact that is being felt in the market for baby boomer businesses as baby boomers are retiring from the workforce and wanting to sell their businesses.

In an excellent small business market update newsletter I subscribe to, called “Jarot Business Valuations“, the author, Chris Milne,  makes the point that:

The “Baby Boomer” exit has been a major factor in supplying the marketplace with a relatively large number of businesses listed for sale over the 2021/22 financial year. If this had not been the case, given the strengthening purchaser demand, it is likely that business sale prices/value multiples would have increased substantially – similar to what happened in the property market.

The relatively large number of baby boomer businesses listed for sale is simply the other side of the coin of the large number of businesses that are not for sale. It is reflected in the tight employment market where the staff required to do the jobs inside the businesses is scarce.

The difficulty in finding staff to operate businesses and the rising number of baby boomer businesses listed for sale have had an effect on the market for businesses.

Buying a Job

The business market where the buyer is buying a job is disintegrating. This is a segment that runs hot traditionally when the unemployment rate is very high and jobs are difficult to get.

The Australian economy is not in that position with a low unemployment rate and a high inflation rate. On the spectrum defined by the famous Phillips Curve, we are in the area of an overheating economy. More about this is in my article, “The Reserve Bank Set up to Fail“.

Chris Milne has made the point that the income that is required to entice a buyer to consider purchasing a business has climbed and so a “buy a job businesses” where the profits to one working owner are less than $150,000 will not have many willing buyers. Demand is higher for businesses with profits greater than $300,000

Baby Boomers Businesses article internal image of a freelance worker at his desk.

Businesses that are considered managed businesses, have an advantage. I have written about them in my article called “Managed Business – How to Get One“.

The businesses that are successful in this area are not necessarily ones where the owner can just stay home and let the business run itself. That generally only occurs via the share market and is truly passive.

The spectrum that a managed business lives on is one which measures the amount of attention required by the owner to run it. These businesses are profitable, providing ample reward for the attention that is lavished on them.

They are also lifestyle enhancing in that they provide the spare mental capacity and time for the owner to enjoy the profit of the business and improve their lifestyle.

These businesses are ones where the owners are looking at a return on investment and not just an absolute return.

Let me explain.

Return on Investment is Different to Return for Living

A return on investment is what a sophisticated business owner looks for. The imperative is to make the investment in the business pay a competitive return. An absolute return is one where the owner is one that I call tired and the imperative is to get enough income to satisfy his or her needs.

The difference here relates to the efficiency of the business.

The tired owner of a baby boomer business will throw staff at a problem and underutilise the capital tied up in the plant and equipment and other parts of the business. It only needs to make a minimum fixed amount of income for the owner.

These baby boomer businesses tend to be overstaffed and overcapitalised. They are in need of reengineering and paring down. They are the ones that are difficult to take over and will sell for less on the market for businesses per dollar of profit. This means that quite often they are overvalued or collapse onto an asset sale rather than a business sale.

The competition between efficient businesses and tired baby boomer businesses feeds directly into the debate currently being avoided by the government and highlighted by the Reserve Bank. That is the debate about productivity.

As we are bookended by the below replacement rate of births at one end of the working population and retiring owners of baby boomer businesses at the other, the need to get greater productivity per unit of labour is great. If productivity does not increase then the tendency is for any stimulus introduced into the economy to become inflationary.

Working more Hours is not Increased Productivity

The solution being imposed by government policy is a proxy one. Rather than increase productivity, there is a drive to increase workers. An example is the policy that favours low-cost or free childcare. This policy does not make a worker any more productive. It allows them to work more, not necessarily better, as explained in an article published by the Gratton Institute.

Having More Workers is not Increased Productivity

Another example of this approach is the move to greater immigration. If this was a productivity-improving policy the problem of overcrowded infrastructure and scarce housing would not occur because increased productivity brings with it its own means. The Guardian recently published an article about the Migration Boom.

It is all about workforce participation rather than productivity. For an article I have written about increasing productivity through outsourcing and specialisation read my article called “Making Money Outsourcing“.

The sustainability of this approach is questioned by all serious analysts. Unfortunately, the solutions are not popular and will offend one constituency or another in the short and possibly medium term.

This is what is driving the search for efficient businesses that have placed emphasis on producing returns on investment that justify the capital that an owner has to provide as well as the attention span

Baby Boomers Businesses article internal image of a group of workers discussing progress charts..

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