Questioning a Silver Tsunami

The concept of a “Silver Tsunami” has garnered significant attention in the mergers and acquisitions industry for many years, driven by the expectation that the impending retirement of the Baby Boomer generation will lead to a surge in owners selling their businesses. This report aims to provide a comprehensive look into the context of the Silver Tsunami. It examines the likelihood of whether an anticipated wave will materialize and explores possible reasons why it hasn’t. The report also discusses how this could be a market disruption. By utilizing an approach rooted in skepticism, this report seeks to critically examine the validity of the Silver Tsunami narrative and potential implications for the M&A landscape.

The 65+ age demographic experienced the most rapid growth among all age groups between 2010 and 2022.

Within the United States, among six age groups (0 to 4, 5 to 19, 20 to 24, 35 to 49, 50 to 64, and 65+), the share of the overall population that is 65 and older increased from 13.1% in 2010 to 17.3% in 2022.

Source: usafacts.org

An estimated $10 trillion in net worth of individuals over age 55 will be passed down to inheritors by 2030.

Baby boomers, typically those born between 1946 and 1964, have been grappling with succession planning for several years. Many heirs prefer their inheritance to be in cash as opposed to the “headaches” of running and owning a business. As of Q1 2021, an estimated $100 trillion net worth of individuals over age 55 will be passed on to inheritors.[1]  This spotlights the issue that inheritors prefer liquidity over illiquid private ownership in a company. Consequently, this dilemma prompted numerous Boomers to postpone retirement and retain ownership of their companies longer due to a lack of interest of successors in taking the reins of a family business. As a result, there is a theory that there is now an increased backlog of sell-side M&As and a flood of businesses poised for sale.

With Baby Boomers now aged between 60 and 78 years old, selling their businesses has become one of the few viable options left. The peak retirement age is often between 65 to 75 years, suggesting that the most significant wave of Baby Boomer retirements and related business sales is anticipated between 2022 and approximately 2030.[2] This has put wind in the sails of a “Silver Tsunami” theory.

In 2020, it was expected that the Silver Tsunami would see over 70% of nearly 12 million privately held companies change hands over the next decade.

As the retirement era unfolds and Boomers are within the window of peak retirement years, the anticipated wave of business sales is fueling expectations of a Silver Tsunami. In 2020, the California Business Brokers Association expected the Silver Tsunami to consist of the transfer of Baby Boomer assets from almost 12 million privately held companies, with over 70% of these businesses expected to change hands.[3] InvestmentBank.com in 2023 stated that 65% to 75% of all small companies will be up for sale in the next 10 years.[4] However, the latest M&A volume tell a different story. Since 2021, the number of national sell-side M&A deals have consistently decreased.

Annual sell-side transaction volume has decreased around 15% each year since 2021.   

Source: S&P Capital IQ

Given this volume decline, what explains the discrepancy between the anticipated business transfers and the actual volume of M&A activity, and will we ultimately see an impact from the Silver Tsunami?

Amidst these assumptions, it is pertinent to address why the expected ‘flood’ of business sales has not yet materialized and whether factors and counterclaims suggest a more nuanced perspective on the impact of the Silver Tsunami phenomenon moving forward.

Many owners resist retirement and are reluctant to make long-term plans due to a deep emotional attachment to their company.

Although a large group is reaching retirement age, the idea of selling a business is difficult to contemplate for most business owners. At this age, it is also unlikely that individuals will pursue entrepreneurship after the sale. Owners often resist retirement and are reluctant to make long-term plans due to their strong emotional attachment to their company.[5] For many, the decision to sell is influenced by a combination of emotions and logic. There is meaning in showing up to work every day, and many business owners tie their identity and motivation directly to their company. From this lens, many boomers are in no hurry to sell. This challenging decision can be postponed for some time, as many Boomers continue to enjoy working and are still in good health.

Moreover, rigorous exit planning is not common among many closely held business owners. In fact, according to a recent survey from Advisors Magazine, 67% of owners of businesses— those with revenue ranging from $5MM to $50MM—put their businesses up for sale without solidifying a formal exit plan.[6] The absence of a plan increases an owner’s risk of the business even selling for a fair market value, not to mention the possibility of struggling to find a buyer. Generational succession used to be a fallback in these situations, and even the preferred strategy.

As a result, this puts business owners in a tight spot, with some ultimately unable to sell their businesses. An estimated 24% of all companies negotiating to sell fail to close a transaction. This inadequate planning and the associated difficulties are factors likely contributing to the delay or potential prevention of a Silver Tsunami.

The Democratic platform includes increasing the corporate tax rate from 21% to 28% which could result in declining business valuations.

Potential market disruptions could also prevent the Silver Tsunami from having a significant impact. While geopolitical tensions and interest rates are apparent factors, an additional notable development is the Democratic platform’s proposed 2025 tax plan, which includes sharp increases to capital gains taxes. Significantly higher capital gains taxes would discourage Baby Boomers from selling their businesses. The current top long-term capital gains tax rate is 23.8%, but under a Democratic led government, the top federal rate would nearly double to 44.6%. When combined with state capital gains taxes – depending on the state – the total rate would approach 50%. When business owners sell their businesses, they often face significant capital gains taxes on the gains from the sale. A doubling of capital gains taxes can make selling much less attractive.

Additionally, the tax plan could lead to lower business valuations. The Democratic platform includes increasing the corporate tax rate from 21% to 28% which could result in declining business valuations by impacting companies’ bottom lines. Free cash flow would decrease causing valuations to decline. Lower profitability can also lead to higher interest rates on loans and increase the cost of borrowing, making it more expensive for corporations to finance growth or operations. The proposed tax increase could also impact equity financing. If higher taxes reduce potential investors’ expected return on investment (ROI), they might be more reluctant to invest. Finally, the administration also proposes a net investment income surtax on profits earned by small businesses, further impacting small business owners.

These proposed tax increases drive many business owners to delay selling their businesses to defer their tax liability, hoping for future tax reforms that reduce capital gains and corporate tax rates when a new administration is in office, which means years down the road. Furthermore, many business owners choose to reinvest in their businesses rather than contribute to a retirement fund, meaning they retire on whatever they can sell their business for. If owners don’t think they can retire as envisioned, they might hold onto their companies to build value and wait for more favorable conditions while taking salary and distribution.

The anticipated increase in deal activity is likely to create a buyer’s market, where increased competition among sellers provides buyers with greater negotiation power and potentially leading to lower acquisition costs.

Despite compelling demographic data predicting a surge in businesses being sold as Baby Boomers reach retirement age, there is a much more nuanced reality to this phenomenon. The Silver Tsunami is more likely to be mitigated by several factors, transforming it into a more manageable ‘storm surge.’ A Silver Storm Surge would bring an increase in deals yet will be balanced out by the factors that prevent a Tsunami, such as the emotional reluctance to sell, the lack of exit planning, and other potential market disruptions.

However, an increase in M&A deals would result in shifting greater leverage to acquirers, characterized by an oversupply of businesses relative to demand. This shift would tilt the balance in favor of buyers, offering them increased negotiating power and potentially lowering purchase prices. Consequently, sellers entering the market should plan accordingly to navigate these dynamics and optimize their outcomes from their life-long legacy of work.

Watermark Advisors

Watermark Advisors, a 22-year-old FINRA member M&A advisory firm, serves clients in all three phases of M&A: Preparation Phase, Transaction Phase, & Integration Phase through a unique approach called “The M&A Bridge.”  If you are contemplating an M&A transaction, please contact Hagen Rogers, Executive Managing Director at 864-527-5960 to learn more about Watermark’s unique collaborative, comprehensive approach to M&A services.

Hagen H. Rogers

Hagen Rogers is the Founder of Watermark Advisors, an investment banking firm he launched at age 31. Born in Greenville, SC, his education and subsequent career took him to Dallas, Houston, Nashville, Charlotte, and Atlanta.  Hagen has facilitated over 30 investment banking transactions throughout his career, including sell-side and buy-side M&As and private capital raises.  He has provided over 50 valuations for corporate clients.  His career includes positions with NationsBank, Chase Securities and Wachovia Securities before founding Watermark Advisors in 2002. Rogers holds a bachelor’s in finance and real estate from Southern Methodist University and an MBA from the Owen Graduate School of Business at Vanderbilt University.