From Crisis to Opportunity: The Role of ESOPs in Addressing the Challenges of the “Silver Tsunami”

With over 33 million small businesses in the United States, closely-held businesses are the backbone of the U.S. economy. These businesses employ roughly 46% of the U.S. population and represent 43% of gross domestic product. This thriving and vital slice of the economy is, however, increasingly at risk.?

Studies show that 51% of the current American business market is owned by Baby Boomers, who are set to transition over the next ten years. Only 20 to 30% of businesses that go to market actually sell, leaving up to 80% without solid options to harvest their wealth and ensure economic continuity into the next generation.

An owner who is “ready” with an attractive business greatly increases the odds that the business will survive a transition of hands.

One solution is implementing Employee Stock Ownership Plans (ESOPs) to boost the number of successful ownership transitions while also providing economic benefits to individual sellers, their employees and the communities in which their businesses thrive.

The State of Ownership Readiness

Risks of Business Owners Not Planning

Between 2000 and 2020, the number of business owners reaching retirement age increased by 87%. This trend continues as the “Silver Tsunami” gains momentum. However, the Exit Planning Institute?estimates that 70% of middle market owners who put their businesses up for sale in 2022 did not have a formal exit plan in the previous year.

This lack of planning puts them at risk of deal failure, receiving low transaction pricing, selling under duress, or struggling to find a buyer. Shifting market conditions and declining interest in generational succession strategies have made it harder to achieve smooth exits.

The Economic Impact of Ownership Readiness

Comprehensive research?done by Project Equity reveals that there are currently 2.9 million businesses in the US that are owned by individuals aged 55 and older. These businesses range from small family-owned businesses to larger middle market firms and they employ 32 million people and generate $6.5 trillion in revenue annually, with $1.3 trillion in wages.

Impact of Local Business Closures

The potential crisis of a failure to transition ownership of a business spans well beyond the deal itself. When private companies leave a community, it leads to job losses and governments struggling to fill budget gaps.

?As more businesses close and retirees leave the workforce, the economic impact will be compounded. This situation will result in job losses, wage compression, and increased dependency on social welfare programs. Diminished income tax revenues will strain the social safety net and put additional pressure on for-profit service providers.

Why Communities Need Closely-Held Companies

When consumers spend $100 at a local business, about $68 stays in the local economy. According to a survey by the US Chamber of Commerce, 70% of businesses encourage their employees to shop locally, 64% of businesses sponsor or donate to local events, and 56% of businesses offer discounts to community groups. These companies also generate tax revenue for public services and infrastructure, contributing to the community’s well-being.

A More Mutually Beneficial Retirement Landscape

ESOPs (Employee Stock Ownership Plans) offer a promising solution for both employees and business owners seeking a better retirement outlook. For employees, ESOPs provide a unique opportunity to accumulate wealth and?secure their financial future beyond a traditional 401(k). By becoming owners through the ESOP, employees benefit from the company’s growth and success. This can lead to a more comfortable retirement, as their savings are tied to the performance of the business. For business owners, selling to an ESOP ensures the continuity and legacy of their business. ESOPs also offer favorable tax benefits for both the selling shareholder and the company.

Looking Ahead

The Silver Tsunami presents an opportunity for America’s closely-held business community to proactively address the challenges ahead. With millions of working-class Americans relying on aging business owners, there is a chance to develop thoughtful exit and succession plans.

By engaging in creative planning and collaborating with a team of experts, business owners can get ahead of the wave.

Employee ownership, in the form of ESOPs, offers a bright future to business owners, the closely-held companies they lead and the communities they serve, providing a positive path forward amidst the “Silver Tsunami”.

Let’s Discuss

As always, our team is available to help illuminate how these insights might benefit your succession planning efforts. If you or one of your clients are interested in pursuing this opportunity, please contact us at [email protected] to schedule a discussion as soon as possible.

A special thank you to our friends at Project Equity for the excellent research and insight that informed this edition of The Unlock. Project Equity is a leader in the movement to harness employee ownership as a strategy to rebuild local economies.