Why our retirement crisis could mean extinction for the family business
In the U.S., family businesses are as iconic as baseball or apple pie. Business consultants frequently extol the virtues of the family-owned enterprise, but sadly, the future of this American institution is in doubt thanks to a perfect storm of economic and demographic forces.
Let’s start by spotting the canary in the coalmine. My company recently polled nearly 3,000 small business owners — primarily mom-and-pop shops with less than 25 employees — in all 50 states to find out how their optimism (or lack thereof) affects various business decisions. One of the more surprising revelations came when we asked about succession planning. We assumed that most business owners would report that they plan to hand their business over to their children — you know, keep it in the family.
Turns out, 41% of American small business owners plan to sell their companies, by far the highest response. Only 19% said they plan to give the business to one of their children, which was the next-highest response. It gets even more dramatic when you filter responses by sentiment. Nearly 50% of business owners who are “very pessimistic” about their near-term prospects are inclined to sell, compared to a paltry 12% of pessimists who expect to hand down the company to posterity.
In a vacuum, these findings could simply mean that it’s a seller’s market for small businesses, which is generally true. But when you factor in the coming retirement crisis for Baby Boomers, the data take on a different meaning: the sell-off is likely out of necessity.
Fully 84 percent of the respondents in our survey who plan to sell their businesses at some point were 45 or older — Baby Boomers, or at least on the bubble. As has been well-documented, Boomers are retiring at the incredible rate of 10,000 people per day. Problem is, poor planning and unfortunate economic events have left many Boomers wholly unprepared for retirement. This leaves millions of would-be retirees looking around for a nest egg.
According to research from GoBankingRates, only about 1 in 4 Americans age 50 and 60 are on track with their retirement savings. Even worse, data from the Insured Retirement Institute suggests that 24 percent of Baby Boomers have no retirement savings at all. Now, as the Golden Years beckon, these hard-working folks are facing fear and uncertainty instead of getting ready for travel and golf.
Broadly speaking, much of this generational problem can be traced back to the Great Recession. On an individual level, this economic catastrophe decimated long-term investments and retirement accounts, wiping out $2.4 trillion in value from 401(k)s and IRAs in the second half of 2008 alone. Despite claims of a total rebound, some reports suggest that Americans are still reeling from the effects of the nation’s worst financial crisis in recent memory.
On a business level, local merchants suffered a double-whammy from the 2008 crash. In addition to losing up to 25 percent of their personal retirement savings, their businesses suffered serious setbacks from tightened credit markets and a prolonged struggled to access working capital. That meant reduced staff, smaller inventories, and slower sales for years. These things have serious ripple effects when your business revenue and personal income are one in the same.
While the economy is back on track, the economic woes of the past decade couldn’t have come at a worse time for Boomers who own and operate local businesses. With retirement looming, aging entrepreneurs are faced with diminished savings, uncertainties around health care, taxes, and social security, and the ever-present concern of extracting enough profits from their businesses to earn a decent living. It’s no wonder they are looking for one last windfall.
So, what can be done to keep the family business off the endangered species list? This is a complex issue, and we’re running out of time, but here are a few places to start:
Increase profits on Main Street
If there was more money to spread around, more business owners would be inclined to keep their companies in the family. According to our survey, attracting customers, making enough money, and controlling costs are all top-five worries for Main Street entrepreneurs. Local businesses are notoriously thin-margin enterprises, and the technology and finance communities haven’t done enough to help this massive and underserved business segment. It would also help if more people shopped locally.
Reduce taxes on small, independent businesses
When we asked which policy area they most want changed, small business owners overwhelmingly said they want tax reform. Taxes have a magnified impact when you’re not a W-2 employee, especially when entrepreneurs see $1 out of every $5 their businesses earn go to the government. As I’ve written before, the №. 1 thing the Trump presidency can do to inspire the country’s 28 million small businesses is pass thoughtful tax reform.
Reduce business regulations
Small businesses face a constant uphill battle against larger competitors and the struggles of staying ahead of a constantly shifting business environment. The last thing they need is more burdensome rules. In fact, 1 in 5 respondents to our survey said the federal regulatory environment is their top reason for business pessimism. This matters because pessimistic owners are 6.5 times more likely than optimists to reduce staff and cut employee pay, and they’re 50 percent more likely to sell their companies as their exit plan. We need a simpler regulatory environment that rewards local businesses that stay independent.
The family business is dying, and there’s more at stake here than nostalgia. Family-owned enterprises add economic value and jobs to the economy and texture to our social fabric. Saving this critical piece of Americana will take a concerted effort to ensure our aging entrepreneurs can retire comfortably as a reward for their many contributions. Let’s make it happen.