Sell, close, or continue? The transfer of US businesses is at a crossroads

A historic wave of ownership transitions is set to reshape the backbone of the US economy. The fate of jobs, local spending, and wealth creation all hinge on whether enough qualified—and diverse—buyers can step in and pave the way for the next era of small-business ownership. In this episode of The McKinsey Podcast, Shelley Stewart III, McKinsey senior partner and global head of McKinsey Insights, Reputation & Engagement, speaks with Editorial Director Roberta Fusaro about the scale and stakes of the “Great Ownership Transfer.” After, Ken Yearwood, McKinsey partner, joins to talk about the risks of inaction and the practical pathways to making these transitions work.

The McKinsey Podcast is cohosted by Lucia Rahilly and Roberta Fusaro.

The following transcript has been edited for clarity and length.

Scale is clear; the system isn’t ready

Roberta Fusaro: Shelley, can you describe exactly what this “Great Ownership Transfer” is and why this moment is so different from past waves of business succession?

Shelley Stewart: Absolutely. Over the next decade, we expect that six million small businesses will transition ownership as baby boomers retire. We estimate that around one million of those businesses are viable candidates for sale. That represents close to $5 trillion in potential business value. So just to give a bit of perspective, 52 percent of small and medium-size businesses are owned by individuals who are within ten years of retiring. That’s compared to 35 percent in 2005. This is a real wave of opportunity coming.

Roberta Fusaro: What are some of the broader implications for the communities in which these businesses operate and the economy at large?

Shelley Stewart: This is obviously a really important topic for business owners and potential entrepreneurs today. Small and medium-size businesses are critical to the US economy. In fact, they employ more than 60 million Americans. That’s nearly half of the US workforce. If you look at certain geographies, particularly in more rural economies, small businesses represent an even larger share of the local economy.

Roberta Fusaro: What are some of the biggest barriers to the successful transition from seller to buyer? Is it financing, planning, or something else?

Shelley Stewart: If you look at the US economy and the engine we’ve built over a couple of centuries to help foster entrepreneurship, it’s quite robust. It’s a really inspiring story. However, we do not yet have the infrastructure required for this transition, which is quite different from the initial business formation.

So it really comes down to a few things. You must identify a set of potential entrepreneurs and ensure that you’re drawing from a broad and robust pool of potential buyers—and you must do that in a systematic way. Financing is also incredibly important.

These owners who are transitioning should be, and expect to be, compensated for their businesses. But if you think about the size and scale of these businesses, they are too small for traditional private equity or private markets in general. Instead, you then consider things like banking products, which often present a challenge for budding entrepreneurs. When you’re working in the context of a bank, you often need personal guarantees or a certain wealth or asset base to draw from. In many of these instances, those conditions just do not exist.

Roberta Fusaro: How does this current system for buying and selling small businesses disadvantage certain communities or types of buyers?

Shelley Stewart: It’s a great question, and my frame of thought is maybe slightly unique. It’s not that the process today explicitly disadvantages, but it goes back to the point I was making around what is required for a buyer to actually take over one of these businesses: You need capital.

Certainly, we’ve looked extensively at wealth gaps and wealth disparities that exist in certain communities or certain parts of the country. If you need a starting personal balance sheet to put up as collateral to make this purchase, unfortunately, those communities often don’t have that financial resilience.

Things are naturally set up in a way that certain communities or geographies just don’t have the financial wherewithal, even though they may have all the capacity in the world, as well as the entrepreneurial drive and interest. So I think the real challenge for us is: What’s the bridge?

How do we acknowledge and recognize that people may not be able to put up personal guarantees, but they can demonstrate a track record of success in some other professional endeavor? And how do we then use that as a bridge to ensure that more of these businesses transition successfully?

Again, it goes back to one of the core points of this piece. For the market to work most effectively and efficiently, we need a broad pool of competitive buyers. We must rethink some of the traditional constraints in a way that services the whole economy.

Preparing the ecosystem for a successful handoff

Roberta Fusaro: When you are talking with potential clients, what are the first steps you would advise them to take as they think about how to prepare for this transition?

Shelley Stewart: It depends on the client and the sector. One part of our client base is higher education institutions. As they think about training the next generation of leaders, whether they be in business schools or elsewhere, I think it is important to foster and prepare people to be entrepreneurs. I would focus on the fact that there are a whole bunch of businesses coming up for sale. And while we’d love for you to come join McKinsey, there’s also a whole bunch of opportunities out there that we need people to take advantage of to help our broader economy.

I think about financial-services institutions that operate in these markets, whether they be large global banks, CDFIs [community development financial institutions], MDIs [minority depository institutions], or other community lending institutions. How are they thinking about developing unique financing tools, leveraging their understanding of local markets and the demand to underwrite some of these businesses?

I think for private capital players—who I also spend time with—most of these businesses are probably at the smaller end of the range. Some play in the lower middle market, but I do think there is a potential play for them, a creative play for some private-capital firms. Perhaps private-credit firms could come up with some interesting products that would help facilitate this.

Roberta Fusaro: If everything goes right—if we can make ownership transfer smoother and more accessible—what are some of the economic or social benefits we could see in terms of local spending and savings?

Shelley Stewart: I think this is a really critical moment in the broader context of what’s happening with the economy. If you think about the opportunity and disruption, along with AI and all the unknowns about the labor market, I think we need to be in the mode of trying to protect as much employment as we can in places where we have something to save and protect.

Many of these businesses are actually more labor intensive, and they will certainly be augmented by AI in some way. But many will still require people to do really important jobs in serving their fellow community members.

So we think if this goes right, we’re talking about preserving north of ten million jobs, hundreds of billions in local spending capacity, and—of course—creating real household wealth over time, both for the generation that’s moving on and the next generation.

You think about jobs, which is income. You think about spending, which shows up in local communities and is self-reinforcing. And you think about wealth creation, which is a confluence and an opportunity for us to do something really special at a time when we really need it.

Closing the gap between risk and readiness

Roberta Fusaro: We just heard Shelley sum up what can go right if these business transfers occur. Ken, tell us what happens if the Great Ownership Transfer fails or we don’t broaden participation among small and medium-size business owners.

Ken Yearwood: The risks are massive. First, there’s the potential for viable businesses to close. These are perfectly healthy businesses. They drive tax revenue. They drive jobs. They are the underpinning of communities across the country. This represents, at a minimum, something like $5 trillion in enterprise value as we think about the implications of these businesses closing.

You get this sort of widening of economic inequality between different groups in our society, which has further implications on communities, governments, and tax revenue. From an economic mobility vantage point, we want to see more participation—and, quite frankly, we will have to see that participation at the scale of businesses that will be up for transition in the years ahead. We know that if we look at the current ownership demographic, 70 percent of owners today are White, and 60 percent are male.

The disparities among different communities in our country and in our society would only be exacerbated if that level of concentration continues. It just represents missed opportunities to expand ownership for underrepresented groups, which hinders economic mobility and wealth creation. Under current trends, only about a quarter of enterprise value from the Great Ownership Transfer would go to women, Black people, Latino people, and rural entrepreneurs combined. So as we think about the implications of the Great Ownership Transfer on economic mobility, there’s a massive opportunity for us to shrink the gap in the decades ahead.

Roberta Fusaro: So small to medium-size businesses are not a monolith. They run the gamut across multiple industries and locations. What are the two or three most practical first steps that a small or medium-size business should take now to prepare for this ownership transition?

Ken Yearwood: I think a couple of things come up consistently that are worth mentioning. First, for owners, start succession planning early. When I say early, I mean years in advance. What does your exit look like? Do you have kids who are interested in becoming part of the business or taking it over? If not, how are you laying the groundwork now to ensure that the business can be transferred successfully in a way that’s beneficial to the owners and their families, but also sets up the next owner for success? No owner or founder wants to see their business flounder once it’s transitioned.

The second is to really make sure that the financial health of the business is in order and to assess where there are opportunities to make improvements that make a business more attractive to potential buyers. There are organizations that will partner with business owners to help them improve and tighten the screws on their business in preparation for sale.

Identify partners like that. This might include working with CPAs or brokers. You need to understand the market and what type of individual or group would be interested in acquiring a business like yours.

Finally, be prepared to understand the financial implications and financing options for both a buyer and, potentially, yourself as you’re thinking about what that transfer and transaction might look like.

Roberta Fusaro: Access to capital is often cited as a huge barrier to business ownership. What are some creative or emerging financing models that could help in these transitions?

Ken Yearwood: There are a number of creative options out there. The first is seller financing, where the seller, believe it or not, provides a loan to the buyer to facilitate the purchase. That’s something that came up in our research and is something that more players in the ecosystem should be aware of and consider taking advantage of.

The second is more of a group-led effort—community capital—where you can pool resources to support local business acquisitions in a variety of different ways. This might include employees or community members coming together to support the sustenance and viability of a business beyond its current owner.

And then in some cases, there’s blended capital structures that combine different sources of funding to reduce risk and increase the types of buyers and sellers that can engage in a transaction. Those are some of the more creative ways to think about access to capital and how to unlock transactions, from both a buyer and seller perspective.

An ecosystem challenge: Connecting buyers, capital, and opportunity

Roberta Fusaro: Are there other specific pieces of infrastructure that would help ease this ownership transition?

Ken Yearwood: I’d say there’s no one answer here. There are pain points across the entire journey, for both prospective buyers and prospective sellers. The theme of all of these is how to reduce friction between them.

There are some ecosystems today that try to connect buyers and sellers. We have learned from our report and from many of our interviews that it’s still not perfect. It’s very hard from the seller’s perspective—you’ve got hundreds of prospective buyers coming to you, and it’s hard to tell which ones are serious, qualified, or have the right experience to be a future owner of the business.

For prospective buyers, you’re reviewing hundreds of businesses to find the right one. It’s a little bit of a needle-in-a-haystack challenge. One way to reduce friction is by developing a plan on how to invest in networks and marketplaces that connect buyers to sellers and increase the visibility of these transactions, which generally happen in quiet spaces.

The second theme is financial. We looked at who on the financing side was participating and the size of deals they were making. If you think about private equity, they’re often participating in deal sizes of $25 million and up. Most of these [transactions] will be $2 million deals.

We call it the “missing middle” in our research. So how do we as a society stand up a small-deal infrastructure that allows financing partners to engage in deals of this size at a scale that makes it attractive to them, as well as to buyers and sellers?

I also think there’s an opportunity for enhanced support from brokers and advisers to both guide the folks leading businesses through a transfer and help sellers. What are the types of businesses that they should be looking for? How do they navigate this sort of needle-in-a-haystack dynamic to find the right business and the right owner at the right time?

Roberta Fusaro: Ken, thinking about the underserved communities and smaller markets, do they require more of the same or something different? Are there tailored solutions or programs that would help ensure transitions in that environment?

Ken Yearwood: I don’t think the needs of these communities are different. However, the need to get more underrepresented people participating will be a massive part of making sure we don’t have what we forecast—up to 92 percent of viable businesses potentially closing because of a lack of qualified and prospective buyers.

For me, this is about increasing participation because of the sheer volume that will transfer. It’s about increasing participation for economic mobility reasons that have implications on jobs, taxes, businesses, and communities across the country.

Roberta Fusaro: To increase that participation, will there need to be changes in policy? You talked a little bit about partnerships, but what other mechanisms could help increase the participation?

Ken Yearwood: I think there’s a number of them. And again, I don’t think there’s one silver bullet answer here. I think there’s a little bit of an ecosystem play: How many things can we stand up to see what moves the needle most? The first thing I think about is engaging anchor institutions in different communities.

How do you get educational systems to encourage students to think not just about their job or career in a traditional sense, but about business ownership as a pathway to success? Someone recently read our report, and one of their hypotheses, as they’re doing their own complementary research, was that we—and the generations before us—have grown up being taught that homeownership is the path to wealth and economic mobility. They hypothesize that this will still be the case, but that, on top of that, business ownership will need to be an important part of the generations that will follow us.

Two is, how do we make sure, as I mentioned earlier, that this sort of “financing missing middle” enables financing partners to engage so more people can participate in the ecosystem? And last, we’ve got to find a way to make this more seamless for both buyers and sellers. I think if there is friction at every point in the process, you naturally have fallout of prospective buyers. You naturally have disengaged sellers who say, “Hey, the transfer of my business wasn’t in the cards for me.”

Rural risk, urban opportunity—and the need to connect both

Roberta Fusaro: Is there something to be said about the location or the geography of these businesses and the implications for potential buyers and sellers?

Ken Yearwood: The short answer is yes. In our research, we find that a lot of these businesses are in rural parts of our country.

The implication, as we look at the enterprise value at stake as a percentage of GDP in those areas, is relatively high. So the implication of that much enterprise value potentially disappearing, as opposed to transferring, on jobs and tax revenue in those communities is meaningful.

This could be cause for concern as we think about how state and local governments engage. The challenge in those rural areas is that the buying pool and financing options are more constrained. Conversely, as we think about urban areas or the urban periphery, the enterprise value at stake as a percentage of GDP is relatively smaller, but that’s mostly because GDP in those areas is huge.

If you just look at the enterprise value at stake, it is a large number. It shouldn’t be lost on local officials in urban or urban periphery regions of our country that this is an issue that should be near the top of their agenda.

From an ecosystem standpoint, as we take a step back, finding ways to connect prospective buyers in urban areas with businesses in rural areas will not be easy to fix, but it will be a necessary challenge to address as part of the Great Ownership Transfer.

Roberta Fusaro: When you’re talking to a client, what’s the first thing they should do after reading this report?

Ken Yearwood: It really depends on the stakeholder. If I’m talking to a state or a local official, the action item is to make sure this is on your agenda. Make sure you recognize the impending wave of potential economic loss, or economic opportunity, that’s at stake for the citizens you serve.

If I’m talking to a bank or a financial stakeholder in the ecosystem, the action item is to identify the tools you can introduce to better engage that missing middle, the 80 percent of businesses that aren’t the $25 million deal sizes but that are inevitably going to become viable parts of this Great Ownership Transfer.

If I’m talking to a prospective buyer or seller, they must prepare early. Think about making sure the business is in order and that you’re working with professionals who’ve done this before and can guide you.

On the prospective buyer front, think about a few things. Where are you focused? What’s the industry play for you? What’s the geographic play for you, especially given the point I made around rural versus urban or urban periphery? How does your set of life experiences best set you up for success in acquiring any business—particularly a specific subset of businesses that you might be best suited to both acquire and run?