With the Baby Boomer generation approaching the point of retirement, there are two pressing questions: How can small business owners in this age bracket transition out of leadership and enjoy their non-working years? And what will happen to the businesses they started?
The Silver Tsunami, an oncoming wave of millions of retirements by small business owners, looms large.
As Grow America Fund’s President and Managing Director of Lending, I love to see small businesses across the country focused on the present and working with great ambition. But it’s important to look to the future and the changes it will bring. Based on past data, we expect that over three million small businesses will change hands within the next decade due to the retirement of their owners.
Many of these businesses are anchors of American communities, and together they represent more than $10 trillion in business assets and tens of millions of jobs.
The future we imagine for every business owner is one in which they are prepared for the days ahead. In this ideal future they can readily sell to a qualified buyer — or have family members or employees ready to step up and take the reins. Either path would mean the survival of the business and its continued ability to provide jobs and support for its local community. But for most small businesses, that’s not reality. Not yet.
The state of play
More than eighty percent of small business owners are operating without succession plans. As these owners grow older, the danger of their businesses closing grows with each passing day. And with the shocking potential of this oncoming wave to affect communities nationwide, we need to put forward a solution now.
Often, small business owners and leadership expect that their companies will remain in the family or that they’ll find a buyer when the time comes. But none of that is certain. Without a solidified plan in place, many businesses are left open to possible collapse. Many of these companies operate informally, with a loose leadership structure and incomplete documentation and financial records. For these reasons, they also face great difficulty in acquiring loans.
Prospective new business buyers often lack the access, advocacy and education that would promote their entrepreneurial efforts. Without these key elements, new buyers are seen as risky. It’s a challenging catch-22 that keeps many from achieving their goals. Without these barriers, the transition could unlock a new generation of entrepreneurs. But without proper planning, and with no clear succession structure in place, these roadblocks make it much more likely that small businesses will collapse at a critical moment.
About 40 percent of small businesses are currently owned by Baby Boomers — a generation of 70 million people whose oldest members turned 80 this year. Fewer than 20 percent of small business owners have formalized succession plans in place, and about 80 percent of those small businesses are either solo or micro-employers. Most are valued at under $2 million.
CDFIs hold the key
Given the immediacy of the issue, it’s more important than ever that community development financial institutions, or CDFIs, step up to provide a solution. Organizations like Grow America, which are experienced in working locally to support communities, need to provide the connective tissue that can stabilize these businesses and, in turn, keep communities afloat. But we cannot do it alone. This is a cause that will require many CDFIs to come together.
In service of that cause, there is a solution that can push us all forward together and guide us toward a better future. The solution I suggest works at two integrated levels. First, we provide previously overlooked sellers with the technical assistance, standardized tools and bookkeeping capabilities needed to prepare their businesses for acquisition financing through the Small Business Administration’s 7(a) loan program or any other responsible solution the market provides. We help sellers identify and resolve potential issues early, enabling smoother transitions and increasing the likelihood that a successful sale can take place.
Equally important, the second part of our approach creates an accessible network that connects prepared sellers with qualified buyers once both meet clearly defined standards. We also ensure that buyers have the financial and operational resources they need to complete the acquisition and succeed as business owners.
This protects everyone involved but also increases the number of deals closed. It’s as much about setting up those connections as it is about supporting people at every step of the way. The ability of CDFIs to provide pre and post-sale support, advisory services and knowledge of community infrastructure allows such groups to coordinate everyone involved and provide everyone with new opportunities. With the inclusion of referral programs and flexible loan products, we’ll have a way to better serve businesses that could otherwise fall victim to neglect.
By establishing this connective tissue between small business buyers and sellers, we hope to bolster communities across America and give everyone involved a greater chance to accomplish their dreams. Business owners deserve the chance to retire comfortably. New buyers hope to build something. And communities ought to thrive.
Change is always coming, but we know we can make the future look brighter. If we approach it together, hand in hand with other CDFIs and like-minded, mission-focused small business advocates, we can provide more opportunities for everyone involved. As we take action, we are also connecting with financial institutions and community organizations to build the solution that a challenge of this magnitude requires. We feel energized to help, and we know small business owners (and potential buyers) have the drive to make it happen. We can’t wait to make this dream a reality.
So why should CDFIs take the lead on building the solution to the Silver Tsunami? CDFIs are uniquely equipped to take on the challenge. As flexible lenders with experience on the ground, we can provide guidance and funding that meets business owners where they are and brings them to a brighter future. With our financial partners at our side (like traditional banks and local credit unions), we can collaborate to support business acquisitions that will build a stronger, more resilient economy.
The good news is that CDFIs have faced difficult crises before. During the Covid-19 pandemic, we mobilized quickly to deploy capital to businesses outside the banking mainstream and launched regional recovery programs after the Paycheck Protection Program, or PPP, wound down. We can and must come together again, this time building a stable network that retiring business owners and their successors can rely on in this critical time.
That’s why Grow America is excited to announce that we’re committed to bringing together the network of people, partners, and solutions necessary to face the Silver Tsunami problem.
The time is now. The Silver Tsunami is upon us. To prevent hundreds of thousands of profitable businesses from closing by the end of this decade, we need to step forward instead of watching from the sidelines. In times of crisis, CDFIs have proven their ability to mobilize quickly to meet the moment.
Join us at growamerica.org/tsunami. The Silver Tsunami is a substantial challenge. But together, we can turn it into an opportunity that keeps businesses afloat and prosperous.
Bryan Doxford is Grow America Fund’s president and managing director of lending.
Guest posts on ImpactAlpha represent the opinions of their authors and do not necessarily reflect the views of ImpactAlpha.
