When you hear “startup”, you might think of the millions of entrepreneurs who have founded new businesses over the past few years. But these are mostly freelancers, contractors and people with full-time jobs who can accommodate a side gig. The real startup story is quietly happening elsewhere: trillions of dollars of wealth are slowly being transferred to a younger generation by boomers selling their businesses to those looking to build their own.
According to a new report from BizBuySell, a business brokerage and research site, the number of small businesses being sold has not only recovered to pre-pandemic levels, but is quickly rising. And the market for would-be entrepreneurs is hot. Business owners who sold their companies in the second quarter of this year are getting 20% higher prices than those who sold their businesses the same time last year.
Boomers are selling at a furious pace and they’re just getting started. This shouldn’t come as a huge surprise. According to the US Small Business Administration, more than half of the nation’s small-business owners are over the age of 50, and approximately 21% of the US population were born before 1964. As of February 2024, according to one study, baby boomers owned about 51% of the privately held businesses in the United States, which is about 3m businesses valued at $10tn.
“The reality is that 10,000 baby boomers retire each day and that’s likely the most important element to fuel the market forward,” BizBuySell says.
Age isn’t the only thing driving this transfer of wealth. Economic, tax and political factors are also part of the equation.
The sales of businesses are strong despite interest rates being at a 20-year high. That’s because a growing number of transactions are seller-financed while other buyers have become more experienced and proficient with technology for better analyzing their return on investments and making their numbers work as the country’s overall economy has recovered from the pandemic. Many business brokers are projecting demand to significantly increase when interest rates fall, which is expected sometime this year. According to BizBuySell, 24% of business buyers say they are waiting for interest rates to decrease before making a purchase.
Capital gains rates – at an average of 20% – are still historically low. Estate tax exemptions from the transfer of wealth to younger generations are at their highest levels in recent memory as a result of the 2017 Tax Cuts and Jobs Act. But these factors could all change depending on the results of November’s elections. Under those circumstances, many of my clients who want to minimize the tax bite of a business sale would have the incentive to make these transactions happen sooner rather than later.
So who would they sell to? Millennials, of course!