Crisis averted: Small business survival in the wake of the silver tsunami

As Baby Boomer small business owners retire en masse in the coming years, new models for transferring ownership to employees are keeping businesses open, preserving jobs, and strengthening communities.

Key Takeaways:

  • By 2030, the entire Baby Boomer generation—one of the largest generational cohorts in the country’s history—will be at or beyond retirement age.
  • 40% of small business owners are Baby Boomers, and millions of them reach retirement age each year.
  • Less than a third of small business owners have an exit plan for when they retire.
  • At least a quarter of current small business owners express an interest in transferring their company to a business partner or their employees.
  • Employees who share in their business’s profits are more satisfied, stay longer, and improve a business’s profitability.
  • New employee ownership models like the one created by Teamshares are excellent options for Baby Boomer business owners who are planning for their retirement and want to leave a strong legacy for their employees and community.

For decades, the United States Census Bureau has been warning of an impending demographic shift that will fundamentally alter the American economy. Colloquially termed the “silver tsunami,” this is the moment when seniors 65+ outnumber children under 18—and it’s expected to arrive in the next decade.

Each year, millions of Baby Boomers, many of whom are small business owners, are expected to retire. Even so, less than a third of these small business owners have a succession plan in place for when they retire.

These businesses are the lifeblood of communities all across the country. They’re restaurants and auto body shops, flooring specialists and floral designers, HVAC experts and cleaning services.

Reports estimate that one in three Americans relies on the income of a Baby Boomer owned small business. Across the country, employees, customers, and communities rely on businesses that are facing a serious succession crisis as their aging owners reach retirement.

In the past, small business owners often passed their business on to a family member when they retired. But that is becoming increasingly rare, with only 4% of small businesses surviving to the fourth generation. To avert this impending crisis for business owners, employees and communities, new succession models are emerging to put small businesses in the hands of the people that know the business the best: their employees.

One of these models is Teamshares, which is supporting a generation through confident retirement by purchasing small businesses from retiring owners and transitioning them to employee-owned small businesses that never have to be sold again.

What is the silver tsunami?

The silver tsunami is a term used to describe the rapidly aging populations of countries around the world, including the United States.

As average family sizes and birth rates have decreased in the past 50 years, generational cohorts have become smaller. This has wide-ranging implications for the healthcare system, the workforce and the housing market.

By 2030, the entire Baby Boomer generation, one of the largest generational cohorts in the country’s history, will be at or beyond retirement age. This will mark the first time that the U.S. population over 65 will outnumber the population under 18.

This population shift has many implications for the economy and workforce, including for the thousands of small businesses whose owners are poised to retire in the next decade and the myriad communities that rely on them. As these older Americans retire, the economy depends on the successful transition and survival of the businesses they have built.

Teamshares and other emerging employee ownership models offer alternatives to retiring owners that want to preserve their legacy and keep the doors of their business open, while in the process maintaining employee jobs and continuing to serve their communities.

How retirement is reshaping the small business landscape

A recent report from BizBuySell suggests that more than a third of current small business owners (37%) are considering selling their businesses in the next few years.

Business owners sell for many different reasons—a desire to move on to another business or into another sector, difficult economic times or an increase in competition, a shift in their sector, health problems or family challenges, even boredom or burnout. But one of the most common reasons that a small business owner seeks to sell their business is retirement.

While larger businesses tend to attract the most attention, the vast majority of American businesses are classified as small, meaning they employ fewer than 100 workers.

There are an estimated 33 million small businesses in the United States, employing nearly half of the American workforce. When you review the statistics, it’s clear that small businesses are an enormous fixture of American community, innovation, and prosperity.

But the past few years have been difficult ones for small businesses, especially those that rely on foot traffic for much of their revenue. With online shopping booming, supply chain issues, and rising costs, retail foot traffic had been declining even before the COVID-19 pandemic.

The pandemic accelerated this shift by forcing many businesses to close temporarily, and fundamentally altering some related consumer behaviors—remote work leading to less frequent commuting, public health advice leading to increased caution around gathering indoors—in ways that further depressed retail foot traffic.

While the small business sector is showing signs of recovery, the Bureau of Labor Statistics predicts that it will take until at least 2031 for the job market to reach pre-COVID levels.

Small business owners who have reached retirement age are facing a difficult decision: to hold on to their businesses as the industry and wider economy stabilizes, or to explore options for retirement in an uncertain moment.

As small business owners choose the latter, they leave the fate of the millions of Americans who rely on income from their businesses in question.

Why some baby boomers are holding on to their businesses

Baby Boomers make up about 40% of small business owners in the United States.

According to the California Association of Business Brokers report, in the next 10 years a massive wave of small business owners will reach retirement age and wish to exit their business. But many small business owners choose not to sell their businesses as soon as they reach retirement age.

Small business owners don’t retire for a range of reasons: lack of a viable succession plan, too little savings to fund their lifestyle in retirement, and reticence to relinquish the identity of small business owner and the meaning that work provides to their life.

In some cases, the barrier is even simpler: a lack of awareness around alternatives. Selling a small business can be a confusing and emotionally challenging process, and it’s difficult for business owners to understand the full range of options available to them.

Because small business owners lack the resources and support of a large organization, they’re often left to navigate big decisions about the future of their businesses alone.

Retirement is a daunting moment for small business owners, evoking a range of intense and conflicting emotions: fear, relief, excitement, and trepidation. At Teamshares, we help former owners navigate this important transition by connecting them to a network of other former owners who’ve chosen Teamshares as their exit plan and can talk through the complex mix of emotions that comes with moving into this new phase of life.

Are you a broker or business owner that needs an exit plan to keep your company and employees in place?

Options for small business owners nearing retirement

The decision to retire is just the first in a series of choices a small business owner has to make when planning their exit. Once an owner decides they want to retire, they should consider the following questions to determine the best course of action:

  • Will the business continue to operate without me?
  • If so, who can take over? Is there someone already at the business who makes sense to take the reins?
  • Does that person have the access to capital to acquire the business outright?
  • If my best option is to sell the business to someone outside the company, what kind of buyer am I looking for?
  • And, most importantly, what do I want my legacy at the business, for my employees, and in my community to be?

By answering these questions before they retire, small business owners can go into retirement with a clear understanding of what their options are and the outcome they desire.

Small business buyers typically fall into one of three categories: close-in buyers (family, friends, employees), third-party buyers who want to continue to operate the business, and third-party buyers who may or may not be interested in continuing to operate the business in its current form.

Historically, small businesses were often passed down to the next generation of a family. According to the SBA, only about 30% of family-owned small businesses make it to a second generation, and 13% make it to the third. So developing viable, scalable succession alternatives is incredibly important.

At least a quarter of current small business owners express an interest in transferring their company to a business partner or their employees. The data supports this as an effective strategy for long-term success.

Employees understand the ins and outs of the business and have a very personal stake in ensuring it not only survives, but thrives. When employees share in their company’s profits, they are more productive and satisfied, and their businesses are more profitable and resilient.

Unfortunately, the reality for small business sellers is challenging. Of the millions of small businesses that are put up for sale each year, over 70% fail to find a buyer. And only a small fraction of buyers are committed to keeping the business in business long term.

But the tides are shifting. New models continue to emerge. Among these, only Teamshares offers retiring small business owners a full buyout while leaving legacy of employee ownership. Using the Teamshares model, employees are gifted an immediate 10% stake in the company, increasing to 80% employee ownership within 20 years.

Planning for a successful exit

If you’re a small business owner on the brink of retirement, there are several concrete steps you can take to start setting your business and employees up for a successful succession.

Teamshares has developed a set of resources to help small business owners plan for their eventual exit from the business, including several succession planning templates to account for different scenarios like a sudden departure, the departure of key employees, and an efficient retirement.

At its most basic, a successful small business succession plan involves the following activities:

  • Create an exit timeline: 3-5 years before you plan to retire, start thinking about the legacy you want to leave and, if you’re planning to sell the business, begin vetting brokers who you would like to work with.
  • Determine the value of your business: Once you have a broker, they can review all your materials and help you get an accurate sense of your current valuation.
  • Organize financial statements: Engage financial professionals like a bookkeeper, controller, CFO or CPA to create a set of clear and accurate documents that communicate your business’s financial health to prospective buyers.
  • Document operations and company processes: To ensure a seamless transition to new ownership, begin to document your company’s processes, including details like employee roles and responsibilities and any assets and facilities that the company owns.
  • Identify a successor: Decide who you think the next leader should be. It could be a family member, business partner, existing employee or a third-party individual. If you’re not sure someone inside the business would make a good candidate, consider whether a generalist leader would be a good next move for the business.

Once you’ve done the pre-planning work and decided how you would like to preserve your legacy, the next step is to figure out the actual details of your exit.

The emerging trend of employee ownership

Most businesses lack a clear successor, and most employees who would be interested in purchasing a business lack the capital to actually take over the businesses they work for. To solve this problem of capital access and legacy preservation, several models have emerged in recent years that allow owners to transition the business they’ve built to their employees.

For small business owners who want to preserve their legacy, keep their business running, save employee jobs and make sure their business will continue to serve the community, employee ownership is a uniquely attractive proposition.

As Baby Boomers retire in greater numbers, employee ownership transition sales are a growing trend in the market.

At Teamshares, we have developed an employee ownership model that accounts for one of the biggest barriers to transitioning a company to its employees—cost.

The Teamshares transaction structure includes no upfront cost to employees thanks to a gradually structured transition to majority employee ownership. The model was designed to be a win-win-win for owners, employees, and customers, allowing companies to stabilize and grow in the wake of an owner departure while also setting employees up to be financially rewarded for their contributions to the business.

Crisis averted: A plan for small business survival

The silver tsunami presents a once-in-a-generation challenge to the American small business market. As Baby Boomers retire en masse, the fate of millions of small businesses hangs in the balance.

With careful planning and an innovative approach to legacy preservation, we can avoid the economic, job market, and community level catastrophes of these retirements. By choosing to transition their businesses to employee ownership, small business owners can find ways to save the companies they have built while also preserving the jobs of countless employees.

If you’re a small business owner who needs an exit plan to keep your company and employees in place, submit your business to Teamshares.

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