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The “Silver Tsunami”—a term coined a few decades ago—relates to the eventual impact of the baby boomer generation retiring, and its waves are starting to crash. In five years, all 76 million baby boomers will be at or beyond retirement age, a segment accounting for ownership of almost half of all small businesses in the United States.
These estimated 4.5 million businesses and the 25 million people employed by them, will lead to an estimated $14 trillion in wealth transfer, according to the “2023 State of Owner Readiness Report” by the Exit Planning Institute.
According to a Forbes article titled “The Silver Tsunami’s Impact On Main Street,” some 41% of the businesses have a viable succession plan, but many others need to be sold or will close down.
How big of an effect this will have on Indiana is hard to predict, but what is clear is that rural areas have the most at stake. According to the U.S. Small Business Administration, so-called Main Street businesses represent 84.8% of total businesses in rural areas and 54.3% of total jobs.
Given the impact shuttering these businesses would have on employees, stakeholders and communities, there are two areas the state can participate in to mitigate risks and maximize the opportunities during this sea change: 1) elevating the prominence of succession planning, and 2) data capture and organization.
According to the Exit Planning Institute, businesses with an exit strategy received 20% to 40% higher valuations than those without one. Indiana can leverage existing support systems like the Small Business Development Center by directing more resources toward these impending retirees.
And while tools like BizBuySell, Baton and others have helped bring some organization, the marketplace for these transactions remains fragmented. Increased integration between government departments and ongoing prioritization of data capture could help serve a more fluid marketplace and help Indiana become a national leader.
While those efforts can help support marketplace formation, the demand side has been growing for a while. Before the Silver Tsunami’s impacts started to become clear, an investment concept called entrepreneurship through acquisition, or search funds, focused on these types of small business acquisitions.
Distinct from mergers and acquisition and private equity, which are also viable methods for an ownership exit, entrepreneurship through acquisition usually has an individual or small group of people acquiring a singular company to then manage operations.
Some of the stakeholder benefits of this investment model: ETA has a longer hold period (five to 10 years) and retains jobs at a higher rate, with less than 10% loss on average; private equity acquisitions have a three- to five-year hold period and up to 30% job loss. While still focused on growth and finding operational efficiencies, because of the broader time horizon, ETA still achieves high return on investment. From 1986 to 2021, all search fund investments had an internal rate of return of 35%.
While the idea, credited to Stanford University adjunct professor H. Irving Grousbeck, began in 1984, it has taken off recently. According to the Stanford Graduate School of Business “2024 Search Fund Study,” a record 94 new search funds were launched in 2023 alone. Additionally, in 2020 and 2021, nearly $800 million was invested in search funds, almost one-third of the total investments since the concept emerged.
Unfortunately, Indiana has barely scratched the surface in this space. Within the study above, only two acquisitions have transacted in the state using this method. With MBA programs, including the Indiana University Kelley School of Business, giving ETA more prominence, this volume will hopefully rise over the coming years.
Some emergent companies in this space for those interested in learning more, are His Fund (his.fund) and SPARK Capital (sparkcapitalin.com).•
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Schutt is the co-founder of Homesense Heating & Cooling and Refinery46 and an lecturer at Purdue University. Send comments to [email protected].
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