Generational Small Business Transfer
Sustaining established family-owned businesses into the next generation is an important issue for rural community leaders. Many small rural businesses are family-owned, but statistics show that few survive beyond retirement of the current owner. According to the U.S. Small Business Administration, only 30% of all family businesses succeed to the second generation. And of these, only 15% survive into the third generation. These facts combined with the realization that many new businesses fail in the first five years demonstrates that losing established small businesses can severely impact economic sustainability.
Many small town leaders are particularly concerned about retaining businesses considered essential to the community such as a grocery store, pharmacy, auto repair shop or a small manufacturer that employees several people. Rural communities are also concerned about the number of young people leaving due to the perception that they must go elsewhere to find good jobs. However, these two trends do create an opportunity to bring retiring business owners and younger residents together to create employment opportunities while sustaining vital local businesses in rural communities.
The Center for Rural Entrepreneurship has developed strategies to assist rural communities in capturing this opportunity. In the process of our development research we learned that most business owners do not have an exit strategy in place. Rarer is a plan to foster continuity of the business to the next generation. Second, few communities consider small business transfer as an economic development strategy. In fact, we were unable to locate a community-based small business transfer model anywhere in the United States. The closest we came was an idea generated out of a town hall meeting in West Virginia to utilize Individual Development Accounts to help young people save to buy a local business.
We have spent several months listening to small business owners, community leaders, economic developers and young people talk about this subject. Based upon their input and our experience working with rural communities, we have developed a process that communities may utilize in putting a small business transfer program in place. The following steps outline this process.
The first step is developing a commitment to small business transfer as an economic development strategy. Community leaders and citizens must commit themselves to supporting local businesses, encouraging their youth, and working with people who can help them successfully implement business transition plans. Most importantly, local leaders must start early if they are to be successful, perhaps five or ten years before the current owner plans on retiring. This period allows the new buyer time to learn the business, build the equity needed to secure financing, and perhaps create new economic enterprises within the business. This period also provides the current owner the opportunity to plan for transition out of the business on their time schedule.
Second, the community must identify businesses that are viable for transition. Seek the council of experienced business owners, perhaps several from outside of the community. Visit with local businesses about their exit strategy. Determine the priority of businesses to work with. Think about what businesses are essential to the community’s future or have the greatest potential for growth. Do you want to target these businesses or work with any business interested in this strategy? How many businesses can you work with at any given time? These are important decisions to be made in consideration of the resources available.
Third, the community needs to identify potential buyers for these businesses. Consider current employees, family members, local citizens including young people, former community members, and neighboring town business owners with a similar business. Consider hosting a web site that advertises local business opportunities to former residents and people who may be seeking to move to a small community.
Fourth, identify the financial resources that can assist the current owner and the buyer of the business. What is the local bank willing to do to support the transfer of businesses to new ownership? Consider options such as a community lending pool, extended purchase plans for buyers with limited cash or equity, support from other established businesses, and state and federal business support programs. Take time to learn what resources are available and don’t be afraid to ask for help.
Fifth, assist business owners and new buyers in coming together and putting a transition plan in place. Utilize your team of resource providers and the development tools you have developed to make the plan workable. Assist in putting a business plan together that incorporates the transition plan. Seek help from experts such as regional Small Business Development Center staff. Identify educational and technical assistance resources that can assist in addressing specific issues. Seek the advice of accountants and estate planners. Consider utilizing existing entrepreneurial training and resource programs to support new business owners.
Sixth, support the current owner and the new owner as they implement their business transfer plan. Communities may wish to utilize mediation services when conflicts arise. This may be particularly important in cases where a well-established business owner and a young person with limited business experience come together. It is critical that every effort is made to maintain a healthy balance between the experienced wisdom and creative energy of these partners. Both attributes are essential to successful business ventures and should be nurtured.
For more information regarding Generational Small Business Transfer, please contact:
Craig Schroeder, Senior Associate
Center for Rural Entrepreneurship
317 South 12th Street, Lincoln, NE 68508
Tel: (402) 423-8788 Fax: (402) 323-7349