How can we preserve the life's work of retiring small business owners?

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On apprenticeships

This week I’ve been thinking a lot about apprenticeship. Apprenticeship is a traditional model of intergenerational knowledge transfer that often culminates in intergenerational wealth transfer as the apprentice takes over the business. Apprenticeship not only preserves craftsmanship but also reinforces deep community ties, weaving multiple generations together and forming a sense of identity around subject matter expertise.

Today, we’ve diluted this powerful apprenticeship model in favor of a corporate model of business, in which commoditized individuals vie for executive titles. The key to success in such a commoditized hierarchy is efficiency not craftsmanship; individualism not community. In such an environment, small businesses may lack appealing options for succession planning. Historically, business ownership would pass to a family member or employee(s), but today, many families and employees haven’t embedded deeply enough in a small business to take over leadership from a retiring business owner.

Succession planning is community planning

Business operators are custodians of their business’s legacy. This significant responsibility underscores the importance of thoughtful succession planning when the time comes to empower the next generation of leaders.

Baby Boomers (born between 1946 - 1964) own about 2.3 million small businesses, nearly three-fourths of which are profitable. With 10,000 Baby Boomers retiring daily¹ , the Small Business Administration estimates that about 10 million baby boomer-owned businesses will change hands this decade² . Succession planning for a seamless ownership transition becomes paramount to preserve the profitability of these businesses. But 70% of small businesses don’t have a succession plan for this transfer³ .

Absent a succession plan (e.g., transfer to a family member or employee), a number of transfer alternatives have emerged. Many business owners are opting to split ownership among all employees or offer employee profit-sharing agreements. Employee ownership or profit-sharing are appealing from a continuity standpoint, but present significant governance challenges in the long term.

Another popular pathway for business succession, search funds are a type of private equity that fund an entrepreneur to search for and purchase a company to operate. Search funds have existed since the 1980s, but are increasingly popular, with the number of search funds increasing 40% annually over the past 5 years⁴ . Search funds enable Baby Boomers to secure a transfer for their small business by increasing the pool of capitalized buyers, but this model frequently drives employee churn due to clashes with industry-outsider leadership.

Modern approaches to intergenerational apprenticeship

Companies are supporting a new vision of retirement for business owners by facilitating a sale to employees or private equity (e.g., search funds):

• Teamshares: An employee ownership platform for small business, driven by proprietary software, education, and financial products.

  • Founders (2019): Alex Eu, Kevin Shiiba, Michael Brown

• Boom: Platform on a mission to make retirement a reality for 10,000 small business owners by passing the torch to the next generation of great American entrepreneurs

  • Founders (2023): Steve Glod, Christopher Weaver

• BizBuySell: The internet's largest “business for sale” marketplace, with 65K+ businesses listed annually

  • Founded (1996): now a division of CoStar Group, Inc. (NASDAQ - CSGP)

Voices of the Upper West Side

My conversations this week with older adults in the Upper West Side (NYC) highlight the opportunity to innovate business transfer⁵ :

• Mentioned last week, Brenda transferred her medical practice to her partners after cognitive impairment began impacting her daily work, and now focuses on her encore career mentoring within her practice.

• Barbara’s CFO husband facilitated the sale of a large real estate development company to private equity as he retired himself, navigating multiple layers of contractual keyman stipulations for multiple retiring executives including the business owner and himself.

• Ronny owned multiple laundromats in SoHo until his retirement, and struggled to secure a single buyer for his laundromats due to building-specific transfer requirements for his different locations’ leases.

Legacy

There is no cookie cutter small business transfer. From the interested buyers, to the possible capitalization models, to the executive stipulations - no two transfers are alike. Several of the retired business owners I’ve spoken with lamented that the new owner had not upheld their commitment to the company’s identity and employees. In modern-day business transfers, we’ve optimized the financial transfer but compromised on the skills and knowledge transfer of an apprenticeship transfer.

We need to improve our ability to match sellers with prospective buyers to prevent the death of the profitable small businesses that are frequently the cornerstone of their communities. I’m hopeful incorporating apprenticeship principles in small business transfers can help preserve the legacy (and profitability) of older adults’ businesses. This next decade will be pivotal in determining our ability to bring legacy businesses into their next phase so that we can honor the life's work of the generations that have come before us.

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¹  Mark Hall. Unsexy But Thriving Businesses: The Hidden Opportunity Gifted To Us By Baby Boomers. Forbes. Jan 25, 2022.

² Ideal Group Subsidiary Oxygen Commercial to Offer One-Stop Loan Opportunities Servicing the Massive, Boomer-Fueled Surge in Commercial Lending. Yahoo! Finance. Mar 5, 2024.

³  SMALL BUSINESS OWNERSHIP TRANSITIONS. Live Oak Bank. Q3’2023.

⁴  Searchfunder.com

⁵  Name and identifying details have been changed to protect privacy.