Millions of Baby Boomers (and Generation Xers) across the United States have spent their lives building businesses from the ground up. But as they reach and surpass retirement age, these businesses are becoming part of their legacy rather than their livelihood.

According to the United States Census Bureau, 51 percent of business owners are 55 or older. Considering that there are 33.2 million businesses in the US, roughly 16.9 million small business owners are nearing retirement and will be looking for buyers. Those in the merger and acquisition (M&A) sector refer to this generational shift of businesses as the “Silver Tsunami.” Between businesses and assets changing hands, the next decade will likely experience the most significant transfer of wealth in American history, reshaping the entrepreneurial landscape for generations to come.

To help small business owners (SBOs) and their advisors navigate the Silver Tsunami, we thought it helpful to discuss the market outlook, the pros and cons of seller financing, the increase in roll-ups, and more.

A Cold Buyer’s Market

With so many businesses going up for sale in such a short timeframe, buyers will have the upper hand. With supply outpacing demand, it will be critical for SBOs to partner with seasoned advisors who can help them minimize risk and maximize value to be successful in the wake of the Silver Tsunami.

This era of business transition will be especially challenging for founder-dependent businesses—and there are a lot of them. In fact, 82 percent of small businesses operate with no employees. To bolster the valuation of these businesses, SBOs should:

• Systematize Operations

• Build a Team

• Strengthen Customer Relationships Beyond the Owner

• Diversify Revenue and Customer Base

• Create Financial Transparency

• Work With a Certified Exit Planning Advisor (CEPA)

It’s important to note that a founder doesn’t have to completely disappear from the business in order to have a successful exit. Many SBOs actually stay onboard post-acquisition for one to three years. However, it’s essential to remember that buyers are looking for business value that can survive without the founder. Otherwise, buyers may feel like they’re buying themselves a job rather than a business.

An Emphasis on Seller Financing

According to the California Association of Business Brokers, approximately 70% of business sales involved some form of seller financing. This figure will likely increase during the Silver Tsunami as many buyers view a seller’s hesitation to offer seller financing as a potential red flag. Their reasoning is simply: If the business is as strong and profitable as the seller claims, then extending financing shouldn’t pose significant risk.

To some extent, that logic holds true. But to the seller’s credit, most (between 70 and 90 percent) acquisitions fail due to integration problems. Therefore, a seller’s reluctance stems from a concern that the buyer may not succeed post-transition, putting future payments at risk. If the buyer defaults, the seller could be forced to reclaim the business in a weakened financial or operational state.

All that said, SBOs holding out for all cash buyers typically receive approximately 70% of the asking price as opposed to their seller-finance counterparts, who receive approximately 86%. But the benefits of seller financing don’t end there.

First, SBOs can benefit from the interest on a seller-financed deal (often much higher than they could receive from a traditional investment). Second, when a seller finances the sale, they typically qualify for installment sale tax treatment, meaning capital gains taxes are paid gradually. Third, financing the sale instills confidence with buyers, which can result in reduced time on market.

SBOs will want to make sure they have an experienced exit team in place that’ll help them build in protections such as a UCC-1, which gives the seller a legal claim to specific assets if the buyer defaults on the loan. They’ll also want a well-crafted promissory note which includes information on the:

• Principal amount (total loan)

• Interest rate

• Payment schedule (monthly, quarterly, balloon payment, etc.)

• Start and maturity dates

• Late payment terms or penalties

• Default provisions

• Collateral (if any) — may reference a UCC-1 filing

• Signatures of both parties

Not only does this approach open the doors to creative financing solutions, but it can also attract a wider range of buyers who, although may be more cash-strapped, could be better stewards of their legacy.

A Cascade of “Roll-Ups”

In a buyer’s market, entrepreneurs are likely to acquire several smaller businesses at a time. Combining multiple businesses from the same sector can open up economies of scale, streamline operations, and reduce risks.

While it may be tough for SBOs to see their business get rolled up in a sweeping set of acquisitions, it’s often far better than liquidating assets or selling to private equity. Furthermore, a pattern has emerged over the past five years that suggests fewer family members are interested in stepping into ownership roles of the family business. This lack of family succession has created a significant ownership gap across Main Street businesses. Therefore, the need for a new generation of entrepreneurs to acquire Boomer-owned businesses has never been greater.

Tools For Building Value

From machine shops and electricians to restaurants and marketing firms, every small business has the opportunity to exit successfully. But as the market shifts and buyers gain the advantage, it’ll be vital for SBOs to create a sustainable, measurable approach to building value.

ELLA’s digital workbench enables exit planning advisors and SBOs to prepare for exit by providing tools that clearly illustrate the value they've built in their business and the roadmap to close the value gap. Sign up for the ELLA Waitlist and get early access to our digital workbench, enabling advisors and stakeholders to prepare for advantageous exits.