According to a study by Bankrate from October 2022, more than half of small business owners in the United States are over the age of 55. This is a core component of the modern search fund strategy and of the small business acquisition revolution – take over a successful business from a retiring owner and grow cash flow to mutual benefit. For soon-to-retire business owners, the equity they own in their businesses is likely a significant source of capital to finance their retirement. Data shows that approximately one-third of small business owners do not have a retirement or succession plan in place, putting significant pressure on their ability to sell their business in the future in order to retire comfortably.
Approximately two-thirds of small businesses with multiple employees are owned by “baby boomers”, who are defined as individuals born between 1946 and 1964, and according to recent New York Times reporting on Department of Labor data, the baby boomer segment of the US economy is undergoing a quiet but significant shift. Since 1999, a major demographic trend has contributed heavily to the size and composition of the workforce: baby boomers are remaining in the workforce well past their expected retirement age. In 2019, 57% of all people over 60 were still working full-time versus 46% in 1999. Virtually all growth in the labor market over the past 20 years came from baby boomers continuing to work as younger generations entered the workforce.
At the start of 2023, with older members of the baby boomer generation entering their 70s and younger members passing the 65-year mark, the US is likely to experience continued shifts in the labor market – baby boomers will not work forever, and the number of baby boomers working full time declined significantly during the pandemic, which saw a significant number of people get sick or retire.
This situation can be challenging for aspiring buyers of small business, both when it comes to negotiating a sale and when it comes to talent management. At companies where the owner and employees are nearing retirement age, business owners may feel a need to sell but have limited redundancy within their employees and limited succession plans. Buyers face the prospect of seeing key employees leave when the owner retires and need to be mindful of managing key employee risk.
The next generation of small business owners
Younger generations, consisting of Millenial and Gen Z entrepreneurs, are driving a parallel trend: the increasing number of search funds designed to acquire and preserve successful companies currently led by baby boomers. The success of this new generation will play a role in the future of the small business economy, increasing liquidity within small business acquisitions through higher transaction volume and bringing additional age, gender, and racial diversity to small businesses nationally. Millennial and Gen Z entrepreneurs bring a unique perspective and set of skills to the table, and their future in small business ownership looks bright.
One of the key areas where Millennial and Gen Z small business owners are likely to make an impact is in the use of technology to enable operations and improve branding, communications, and customer service. These younger entrepreneurs are digital natives, and they are well-equipped to leverage technology in order to streamline processes, improve efficiency, and enhance the customer experience.
Growing numbers of younger entrepreneurs will change the small business landscape, molding it to their needs and preferences. One potential example of this could lead to increased liquidity in the small business acquisitions marketplace. Unlike baby boomers, who often owned their businesses for decades, the median holding period for a business acquired by a search fund is only 5.7 years (according to the 2022 Stanford Search Fund Study), indicating that the new generation of buyers has a tendency to purchase a company, implement changes, and sell for a return on investment. With businesses changing hands more often, the market could see increased activity and opportunity going forward.
Open call for new buyers
As the demographics of small business ownership shift, it is increasingly important to expand the pool of buyers beyond traditional sources such as Ivy League schools, family offices, and former private equity professionals. The future of small business ownership will be shaped by a new generation of entrepreneurs, including millennials and Gen Z, who bring a fresh perspective and a wide range of skills and experiences to the table. This includes individuals and groups from a variety of backgrounds and industries, including those who may not have previously considered a career in small business ownership. By opening up the market to a new generation of buyers and owners, we can help drive the economy forward and create a bright future for small businesses of all types and sizes.