Baby Boomers Are Retiring. What Will Happen to Their Businesses?

Earlier this year, McKinsey released a report on the massive transfer of ownership that will occur as baby boomers retire and look to sell the small businesses they have operated for years. Put simply, the market is not ready to handle this shift, in large part due to constraints on capital availability.

• As McKinsey wrote in the report: "Whether the Great Ownership Transfer becomes a story of loss or renewal will hinge on the availability of the capital and ability of infrastructure to adapt to the high-volume, small-deal segment that anchors local economies."

To set the stage:

• Currently, one in four small business owners is over the age of 55.
• McKinsey estimates that 6 million small businesses will need new ownership during this period.
• In 2022, 92% of the half-million small businesses that exited the market closed shop altogether. Only 8% were successfully sold or transferred.
  

Buyers need capital

Among the clearest issues facing potential buyers of small businesses is a lack of access to capital. Right-sizing capital requirements, adjusting regulations, and promoting lending are tangible steps that regulators can take towards a future where prospective business owners can afford to enter the market. This is especially important for underserved and minority entrepreneurs who are the least likely to have excess capital, and the most likely to rely on bank loans and credit.

• "The impact of the Great Ownership Transfer falls disproportionately in rural areas and among underrepresented communities, where access to capital, advisory support, and success networks is more limited."
• "Manufacturing metropolitan areas and rural manufacturing workshops show moderate exit intensity but high concentrations of enterprise value, where the primary challenge is ensuring sufficient capital and capability to sustain productive capacity through transition."
• "Expanding access to capital, buyer preparation, and inclusive ownership models could turn the Great Ownership Transfer into one of the most powerful near-term levers for preserving jobs, expanding ownership, and narrowing geographic, gender, and race-based disparities in wealth accumulation."

Rural areas are at the highest risk

One of the most striking details in the McKinsey report is how extensive the risk to rural and small-town communities will be. In small, rural states like Vermont and Wyoming, upwards of 3% of the state's entire GDP could be at risk due to generational turnover in small business ownership. Rural areas face two main challenges:

1. Small communities have fewer businesses overall. A small number of closures disproportionately impacts the local economy, as well as the vibrancy and diversity of the local economy.
2. Small communities have less local capital. In places with few high-dollar investors and large businesses, it is harder for entrepreneurs to source financial backing. Bank loans and credit are especially important here, providing small communities with the resources they need.
   

What this means for financial policy

Changes in capital allocation requirements will materially impact young entrepreneurs looking to take over businesses when baby boomers retire. This is especially true in rural communities. The more loans and credit that banks of every size can offer, the more access prospective entrepreneurs will have to the assets they need to sustain their communities.

If you'd like to read McKinsey's full report, you can find that here.

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