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5000 Boomer-Owned Software Businesses to Shut Down By 2021

As a generation of Baby Boomer business owners plan their estates, some in the software industry say that thousands of firms providing the highly-specialized software running many businesses will cease operations or be absorbed by competitors by 2021. This will lead to the largest ever consolidation of business software: the elimination of as many as 100,000 tech jobs and the evaporation of billions of dollars in value from Boomer estates.

Michael Zammuto, CEO of Cloud Commerce Consulting specializing in advising mid-sized software companies, claims “These firms are at a crossroad and, while a few will sell for big dollars, I expect 5,000 will be gone by 2021. Many companies, employees and their customers simply are not prepared.”

Boomers Automate Every Business

Baby boomers are the generation born between WWII and 1964.

Baby boomers are the generation born between WWII and 1964.

Throughout the late 1970s and into the 1980s, the personal computer revolution and access to inexpensive and simpler software programming tools allowed enterprising Baby Boomers to found independent, usually niche or vertical business software and service companies providing the first software to thousands of types of businesses including storage units, produce wholesalers, furniture manufacturers, liquor distributors, call centers, collection agencies, insurance companies, restaurants, and thousands more. These businesses required highly specialized solutions to replace their paper-based processes for every aspect of the business including purchasing, manufacturing, service delivery, customer service and account management. Businesses of all sizes bought their first computers and built their first computer networks, launching a revolution in business productivity.

Young software firms often customized the software for each new customer and structured software licensing deals where large licensing fees are captured up front followed by smaller annual maintenance fees of 10% to 20% of the original licensing costs. Over time, software for even small businesses could grow to include thousands of options and configuration settings, ensuring the sales and setup of the software was a costly and lengthy process. As a result, software companies producing vertical software solutions developed fewer economies of scale than more horizontal software providers such as IBM, Salesforce.com or SAP.

Rapid Growth but Little Consolidation

New industries often experience rapid growth in the number of startups followed by similarly rapid consolidation. For example, hundreds of automobile manufacturers were started in a short time span. But, in the 20 years following 1909 more than 200 of them went out of business. This trend eventually left a few huge Detroit behemoths with access to top talent, technology and cash. The software industry grew rapidly throughout the 1980s and 1990s. For reasons that are unique to vertical business software this segment often bucked the traditional patterns.

A similar trend of consolidation did occur in many segments of the tech industry. Computer hardware companies, providers of operating systems and ‘horizontal’ business software like accounting poured hundreds of billions of dollars of sales into IBM, HP, Microsoft, Dell, Cisco, Salesforce.com and others providing the platforms for personal computer and internet revolutions. In the 1990s, search engines exploded in number and then consolidated to Google and Bing whose combined market share is reportedly over 95%. Unlike computer hardware, search engines and horizontal software companies, many vertical business software segments didn’t consolidate in the same way.

For many boomer-founders, selling their business is the key to retirement and providing for their families.

For many founders, selling their business is the key to retirement and providing for their families.

The founders of many of these vertical business software companies discovered that it was more difficult to raise growth capital or find strategic buyers. The high degree of customization, often relatively small vertical market sizes and usually aging technology limited their appeal as acquisition targets and their access to the capital markets. Some leaders in the space, often backed by private equity, acquired competitors but their success varied due to the same factors that prevented natural consolidation.

Many firms stayed founder-led (or at least family dominated) to varying degrees of success. Most founders discovered their kids couldn’t or wouldn’t take over the business. Much needed outside management expertise and investment capital went to faster growing horizontal software and internet businesses.

Retirement Delayed

Annual Baby Boomer Retirement Numbers in millions

Annual Baby Boomer Retirement Numbers in millions

Now the one obstacle the founders haven’t been able to avoid is at the door. These founders, with immeasurably valuable experience, are getting old. The oldest boomers are already over 70 with millions more crossing that line every year. Many have stayed vibrant much later than their parents did and are working long after they expected to retire. Their businesses stayed successful enough to keep them engaged but many are still dependent upon their founders’ involvement. Like other Boomers, many are not as financially prepared as they expected due to the 2008 financial crisis and high, long-term health costs eating into their retirement and estate plans.

Large numbers of these firms will not find buyers.  Many will simply cease operations, either de-facto closed or sold at bargain basement prices and absorbed into larger software firms. This will lead to a huge opportunity for those few survivors who can gain market share faster than before and an opening for the horizontal platforms and startups looking to take their places. “The ones who survive are preparing today,” Zammuto says, “Cloud Commerce Consulting has a 90-day transformation process to improve these businesses to make them more attractive to acquirers or improve profits and cash positions so they can survive and thrive.”

Contact Cloud Commerce Consulting For a Free Assessment of your software company