HOUSTON — By 2030, all baby boomers will be at least 65, putting them in retirement position within a few years, if they haven’t retired already by then. This will launch a "silver tsunami" of businesses available for sale, according to one hospitality lawyer.
The restaurant industry just crested $1 trillion in annual revenue, and 40% of that industry is owned by baby boomers, with about 10 million of those being small businesses, said David Denney, principal at Denney Law Group at the Hospitality Law Conference. There are 10,000 baby boomers reaching 65 every day, meaning there’s going to be a major transfer of wealth over the next 10 years.
“We’re in the thick of it, so this is the time,” he said. “It doesn’t matter if you’re selling hotels, you’re selling shopping centers, buying shopping centers — this is the time.”
While his focus is on restaurants, Denney said effects of "the silver tsunami" and the need for succession plans will touch all industries. His work in recent years has focused on startups, leases and alcohol permits, but he’s seeing more interest now in succession plans. There was a lot of volatility before the 2024 presidential election, there was some uncertainty after it and now tariff questions and inflation are making everything more expensive.
Now there are more opportunities to grow by buying existing businesses, and the buyers are going to spend “almost to the penny” what they would have building from scratch, he said.
“The shift is — don’t put 30% more construction costs into your budget,” he said. “Go buy a brand with lots of goodwill and grow it because the owners don’t have the wherewithal to grow that brand five, 10, 20 more units. They’re just maintaining their paycheck.”
Most of the merger and acquisition work his firm has handled in the last two to three years has involved 70-plus-year-old owners looking to move on, Denney said. His company recently worked on the sale of a Tex-Mex restaurant brand from a group of septuagenarians, who were originally employees of the brand and bought it from the founders, to a new owner in his 30s with five of his own concepts.
Many of these opportunities are opening up because the owners’ children don’t want to continue the business, he said. The buyers are first-time owners or established individuals and private equity.
“There is a lot of private equity that’s coming in and taking these established brands with the goodwill and looking to expand and grow them because that’s where the arbitrage is,” he said.
Some owners are reluctant to figure out a business succession plan because they feel like they’re facing their own mortality, but that’s the wrong approach, he said. Succession planning doesn’t mean estate planning. It means figuring out who’s going to take over the business, but it’s hard to think about that while in the middle of running the business.
Buyers can find profitability when the business is no longer being used to fund the previous owner’s lifestyle, he said. When buyers find profit, they find reasons to buy the companies. Bringing in a management team and growing it through new properties adds further profitability.
Modernizing the business is another pathway to growing profits, he said. Maybe the prior owner didn’t invest in the infrastructure or used a long-time friend to do the bookkeeping.
“There are real ways to economize, to find supply chain efficiencies and to plug it into your system and just make them thrive,” he said.
Referring to the Tex-Mex brand deal, he said the buyer didn’t realize initially he was also buying a jarring facility for the salsa sold at the restaurants. The seller wasn’t interested in selling the jars of salsa at grocery stores out of fear of diluting the brand. The new owner has deals with HEB and Whole Foods for the salsa on top of the restaurant business.
“It's just mailbox money, which is great,” he said.
One of the challenges owners face when considering the sale of their legacy business is they will inherently value it higher than the paperwork says it should be valued, Denney said.
“There is an unquantifiable emotional component to the valuation of your brand, simply because of the fact that you have built it, and you put all this work into it,” he said.
Sunken cost fallacy is another issue, as owners will think back to how much they invested in their business to make it succeed and wonder how to recoup that, he said.
He said he encourages owners to get independent, third-party valuations or to drill down into the numbers with a good certified public accountant with experience in the industry to get the realistic numbers. There are all kinds of myths in the market about earnings before interest, taxes, depreciation and amortization multiples for purchase price, and the ones that make the headlines are the high ones that artificially inflate people’s estimates of what they’re going to get for their own businesses.
Most of the time, they’ll look at EBITDA, but there are times they won’t, he said. Sometimes the EBITDA multiples won’t get them there. Sometimes there’s no need because the buyer is buying it for the brand, for the location or another reason.
Private equity, however, is generally not going to look at the brand as an acquisition target unless it has $5 million in EBITDA, and that’s the lower-grade private equity, he said. It will take $10 million in EBITDA for “real private equity” to be interested in buying, he said.
“There are not that many independent companies in any industry that have $10 million EBITDA, it’s just really hard to do,” he said.
Sellers need to do their own due diligence to keep a deal from falling apart, Denney said. A landscaping client with about $60 million in revenue was looking at an exit in the neighborhood of nine figures. The deal was progressing, but earlier this year, the buyer was concerned about the I-9 forms that show employment eligibility. They didn’t want to take on any liability regarding problems with immigrant labor.
“A nine-figure sale got tanked from two buyers because of not even (anything) really bad, just sort of not great I-9 compliance in document retention, and the companies left,” he said.
The client was in good shape because they didn’t have to sell, and this experience helped guide them to prepare their company for a sale later on, he said. The company hired an independent third party to do the I-9 audit, and any owner doing the same should hire a lawyer do it so they have attorney-client privilege in place.
“So, we want to anticipate the kinds of things these buyers want to ask, want to see, want to know,” he said. “You’ve got to have really good financials that have got to be really buttoned up.”