Sell, close, or continue? The transfer of US businesses is at a crossroads

The US faces a significant economic challenge and opportunity as a wave of baby boomer small business owners prepares for retirement, a phenomenon dubbed "the great ownership transfer." Over the next decade, approximately 6 million small businesses are expected to transition ownership, with about 1 million viable for sale, representing up to $5 trillion in potential business value. This is a substantial shift, as 52% of small and medium businesses (SMBs) are currently owned by individuals within ten years of retirement, compared to 35% in 2005. Small and medium-sized businesses are crucial to the US economy, employing over 60 million Americans—nearly half of the workforce. They are particularly vital economic engines in rural America. The successful transfer of these businesses is critical for preserving jobs, maintaining tax revenue, and sustaining communities nationwide. However, several barriers impede successful transitions. The current infrastructure for business transfer is underdeveloped compared to that for initial business formation. Key challenges include identifying a broad and robust pool of potential entrepreneurs and securing financing. Many SMBs are too small for traditional private equity, falling into a "missing middle" where banking products often require personal guarantees or substantial initial wealth, conditions many budding entrepreneurs cannot meet. This disproportionately disadvantages certain communities with existing wealth disparities, hindering economic mobility for underrepresented groups. If successful, the great ownership transfer could preserve over 10 million jobs, generate hundreds of billions in local spending, and create household wealth across generations. It presents an opportunity to protect employment amidst economic shifts and the unknowns of the labor market, especially as many SMBs are labor-intensive and serve essential community needs. Conversely, failure to facilitate these transfers could lead to the closure of viable businesses, resulting in massive economic losses, the widening of economic inequality, and negative impacts on communities, governments, and tax revenues. The current ownership demographic, where 70% of owners are white and 60% are male, suggests that without broader participation, existing disparities would be exacerbated. Under current trends, only about a quarter of the enterprise value from this transfer would go to women, Black people, and Latino people combined, highlighting a missed opportunity to expand ownership and foster economic mobility for underrepresented groups. To prepare for this transition, business owners should: 1. **Start succession planning early:** Years in advance, consider exit strategies, family interest in the business, and how to set up the next owner for success. 2. **Ensure financial health:** Assess and improve the business's financial standing to make it more attractive to buyers. Seek partnerships with organizations, CPAs, or brokers that specialize in preparing businesses for sale. 3. **Understand financial implications and options:** Be aware of financing options for both buyers and sellers, including creative models. Creative financing models include: * **Seller financing:** The seller provides a loan to the buyer to facilitate the purchase. * **Community capital:** Pooling resources (e.g., from employees or community members) to support local business acquisitions. * **Search funds/Entrepreneurship Through Acquisition (ETA):** Individuals secure funding from a search fund to acquire a business. * **Blended capital structures:** Combining different funding sources to reduce risk and broaden participation. Beyond financing, additional infrastructure is needed to ease ownership transitions: * **Reduce friction between buyers and sellers:** Invest in networks and marketplaces that connect buyers and sellers, increasing the visibility of transactions that often happen in private. This helps sellers identify serious, qualified buyers and helps buyers find suitable businesses. * **Develop a "small deal infrastructure":** Create mechanisms for financing partners to engage in deals typically valued around $2 million, making these smaller transactions attractive at scale. * **Enhance support from brokers and advisors:** Provide guidance to both owners navigating a transfer and buyers searching for the right business. Increasing participation from underserved communities and smaller markets is crucial. While their fundamental needs may not differ, tailored solutions are necessary to ensure a sufficient quantity of qualified buyers. This is not just about addressing the sheer volume of businesses transferring but also about promoting economic mobility, jobs, and wealth creation across the country. Policy changes and ecosystem plays are vital. Engaging anchor institutions, such as educational systems, to promote business ownership as a path to wealth and economic mobility is essential. Ensuring financing partners can engage with the "missing middle" of businesses is another critical step. Finally, making the transfer process more seamless for both buyers and sellers will reduce friction and prevent prospective participants from disengaging. Geographically, many businesses up for transfer are in rural areas, where their enterprise value represents a significant percentage of local GDP. This implies a substantial risk of economic loss if these businesses close, especially given the constrained buying pools and financing options in these regions. While urban areas have a smaller percentage of GDP at stake, the absolute number of businesses and enterprise value is still large, requiring attention from local officials. Connecting prospective buyers in urban areas with businesses in rural areas presents a necessary, albeit challenging, task. For stakeholders, key takeaways include: * **State and local officials:** Recognize the impending wave as both potential economic loss and opportunity, making it a priority on their agenda. * **Financial stakeholders:** Introduce tools to better engage the "missing middle"—the 80% of businesses not in the $25 million+ deal size. * **Prospective sellers:** Prepare early, ensure business readiness, and work with experienced professionals. * **Prospective buyers:** Define focus (industry, geography), and leverage life experiences to identify and acquire suitable businesses, particularly considering rural versus urban opportunities.