The Silver Tsunami – referring to the demographic baby boomer generation that is retiring, aging and dying – was coined nearly two decades ago. Originally, it highlighted the looming healthcare crisis.
Yet, this tsunami’s effects will be far reaching, touching nearly every industry. Did you know that the US population has never been older than it is today?[1] That almost half (40%) of small businesses are owned by baby boomers?[2] Or that ~42% of wealth managers and advisors are over 55 years old?[3]
One impact we believe at Fluent Ventures will be particularly acute is for small and medium business (“SMB”) sales.
What happens when a boomer small business owner wants to retire, but their kids don’t want to take it over? This is as much of a pain point for the aforementioned wealth managers, as it is to my mother, who runs her own medical practice.
For many Plan A is to shut down. So is Plan B.
In the US there are over 33 million SMBs, and is estimated that at least 4.5 million privately held businesses poised to transition within the next decade[4] (up to 12 million in a 15 years forecast, equivaling to ~40% of total SMBs)[5]. This represents $14 trillion in business wealth at stake. [6]
This is fourteen times the GDP of Switzerland.
Similarly, in Europe, it is estimated that at least 450k businesses are subject to transfer every year[7], which is largely increasing due to a continuous aging population.
SMBs, account for 99% of all businesses in the US (and a similar percentage in most countries, including in Europe). They are the primary driver to employment and to economic growth. Yet, many owners are like my mother who runs her own medical practice with a few employees. As retirement age approaches, they have no transition plan, and most likely will simply shut down. Business survival is more than uncertain. It is unlikely. In the next section we dive into why.
The status quo: retiring small business owners have limited options
Broadly speaking, many of these small business owners can pursue either internal or external transitions as they reach retirement age.
Often imperfect internal transitions
Internal options consist of transferring the business to family members or selling it to existing managers and employees.
While most business owners prefer an internal transition – with family driven ones being the most favored approach[8], a lot of them don’t have family members available or interested in pursuing this option.
Business owners who opt for the second most common internal strategy—selling to employees—are often motivated by two key factors: the desire to reward their employees and the aim to create a lasting legacy through the continuity of their companies.
These are fraught with challenges. The family members or employees may not be ready, trained, or have the same business acumen as the retiring owner. Employees may not have the capital to purchase the business (or the business does not generate sufficient cash flow to support an employee led purchase).
External transition: third-party buyers like Private Equity
Private Equity (PE) has been an important player in this segment. PE firms have historically been key partners in acquiring a business, provide access to capital and eventually help find a buyer. They offer substantial capital infusion, reasonable selling price, and brings professional management.
However, there are important considerations for SMB owners in selling to PE:
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Many small businesses fall well below minimum revenue thresholds: While some PE firms doing “micro deals” might set their revenue threshold lower, the truth is most PEs target companies with at least $5 or $10 USD million in EBITDA to even be of their interest[9]. Considering that around 35% of SMBs have annual revenues of less than $5M[10], this is often a deal breaker, particularly for smaller companies.
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PE sales can be complex to navigate, particularly when owner is retiring and will no longer be present: The process of selling to a PE firm can be complex, involving rigorous due diligence and negotiations. Owners may find themselves navigating unfamiliar legal and financial landscapes, including when reaching a valuation for their business and being asked to provide detailed documents on their daily operations they might not even have.
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Small businesses may not fit the investment criteria: Besides minimum revenue, PE firms often look for companies with established cash flows, organizational structure, ideally in non-cyclical industries where there is a clear exit strategy.
The above makes PE a much more viable product for “M” in SMBs: medium sized businesses.
A growing “old” solution on the lower end of the PE market are search funds
Search funds are effectively PE funds for single deals, and are growing in popularity in MBA programs. Unlike PE, search funds tend to be more flexible around the acquisition process. Their model is less scalable since they acquire only one company, across a multi-year holding period. When no succession plan is in place, they can transition the operation and preserve the business’ legacy.
Unfortunately, while search funds can serve some generational transition SMBs, they just don’t do enough volume to solve the market challenge. Since its inception in 1984, around 680 search funds have been formed in the US and Canada[11], with approximately 94 new ones launched in 2023. Almost irrelevant when compared to the millions of SMBs.
Non-institutionalized buyers
The last approach of course is to sell to non-institutionalized buyers, like other local entrepreneurs.
The problem is that this market is quite illiquid. Fewer than 30% of SMBs manage to sell successfully, and only about one-third of owners have established a formal succession plan.
This often requires brokers which face capacity and timing constraints, and for the similar reasons as Private Equity buyers, prefer larger deals. This often makes this market one-off, hard to navitage and generally illiquid.
Enter new technology solutions.
The best ideas come from anywhere and scale everywhere: new global models we are excited about
As William Gibson once said: “the future is already here, it is just not evenly distributed.” Finding this future is Fluent VC’s raison d’etre. We look for proven models that exist somewhere, and help replicate them across geographies.
There are a number of global models that are scaling around the world tackling this issue.
1. Next Gen SMB brokerage to increase coverage in the business landscape:
One of the fastest growing unicorns in the world is helping SMBs find new owners, and helping buyers in their search for acquiring businesses. No, its not in the U.S. Neither in Europe. The M&A Research Institute has scaled in Japan.
The M&A Research Institute, was founded in 2018 by Shunsaku Sagami to address the challenges faced by aging business owners in Japan. Inspired by the founder’s grandfather’s experience of closing his real estate agency due to a lack of successors, the company specializes in SMBs mergers and acquisitions. By leveraging AI to match business owners with potential buyers, the institute has facilitated numerous successful transactions, contributing to the preservation and growth of SMBs in Japan. Sagami has been recognized as one of Japan’s youngest billionaires, and the company exceeded 1 billion valuation just 3 years after launch.[12]
SMB brokerages solve a few key challenges at the same time.
– Trust and transparency: One of the reasons it is difficult for SMBs to find new owners is that data quality can be poor. Profitable SMBs can actually be unprofitable when accounting for the owners’ time. Unprofitable SMBs may actually be quite strong businesses after factoring for the owner mismanagement. New data platforms let SMBs ingest the data, standardize it. Because brokers have seen many similar companies, they can benchmark performance.
– Efficiency: Most investment bankers can only handle a small handful of simultaneous transactions. Yet the amount of work for any number of deals is the same. Here artificial intelligence can automate many processes. For example, teaser and CIM creation can be auto-generated.
– Matching: One of the challenges to sales, particularly to strategics is to understand “synergies” – the very real benefits that emerge from combining similar or complementary businesses. These largely fall in two categories: revenue expansion from cross-selling services to separate customer bases and operational efficiency.
The challenge, as noted previously, is that the investment banking / brokerage model just doesn’t scale down to small businesses efficiently. This is why the automation, and A.I. driven approach is so powerful.
We have invested in Iconic, which we believe is poised to become the leader in this category domestically in the US.
2. SMB Sales Marketplaces
We believe SMB brokerages are part of the solution. Much like Zillow and Redfin did for real estate and the MLS, we believe new platforms will faciliate the discovery of sales, and in some cases help consumate the transaction digitally.
Today, the dominant marketplace platform is BizBuySell (with an inventory of ~65k listings for sale annually and more than 3.5 million monthly visits[13]). New players are emerging combining some of the tools of brokers with a marketplace model.
For a new marketplace to be successful, we believe they will need:
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Quality supply: Being able to attract high quality companies, provided that this will largely determine having quality buyers. This is a chicken and the egg game.
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Long sales cycles: Specially for a marketplace-oriented model, reaching high volume will become key to scale. Thus, from a sellers’ perspective, selling their business is probably a one in a lifetime decision, which means the decision process to sell, pick an intermediary, and feel comfortable with a buyers’ offer might take longer.
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Standardization and automation: Parts of the discovery and sales process can be simplified through technology (i.e. valuation tools).
Because of the human element in transactions, and the inherent complexity in many, we expect marketplaces and brokers to work together over the long-term. We have partnered with Baton, which is the leading SMB sales marketplace in the US and recently raised their $10m Series A.
At Fluent, we would love to support brokers or marketplaces in other geographies around the world, including Europe and Asia.
3. Employee Ownership Models that are alternatives to PE
My wife’s grandfather was an entrepreneur. Family lore retells how he lost it all trying to do the right thing and selling his business to his employees.
His motivation was that it was 100% the right thing to do – reward those that helped him build the company. In this eyes, there are tremendous benefits for workers and in theory strong employee ownership are clear solutions for transition.
But, there was little infrastructure to support this at the time. The result, he did this primarily via a seller note (selling the entire business on credit to the employees).
The problem: the employees who had limited professional management experience and no skin in the game, ran it into the ground. He lost everything.
While many surveys consistently show that an employee sale is a preferred route for many business owners intellectually – deal structure and these types of complexities are often a key hangup.
New companies are emerging that facilitate employee ownership. For example, in the U.S., Teamshares has built a repeatable process to acquire SMBs, offering owners an exit, recruit a new president to lead the company, and implement employee ownership to continue the businesses’ legacy and align incentives. These transactions combine a mix of employee ownership, equity from the business and leverage. Teamshares administers the entire process. They also sell a number of software and fintech tools that expand the revenue potential of the business and help ensure the business is properly managed.
When Teamshares acquires a small business, 10% of the stock is granted to the employees, gradually increasing across the next 20 years until reaching 80% employees’ ownership[14]. Employees do not have to buy stock, they earn it through their ongoing service which is a key difference when compared for instance to a stock option plan. They combine this with incoming Presidents – professionally trained managers, which derisks the transaction.
The big advantage of this approach is that it preserves the legacy of the business but also empower employees to take an active role in its success. Ultimately, the company aims at leveraging the shared interests of employees and the business, enhancing the overall productivity and morale of the workforce.
Teamshares has developed a software platform designed to facilitate employee ownership at scale. Currently, Teamshares has successfully acquired over 90 companies across 31 states, and 42 industries, with plans to build a network of 10k employee-owned companies.
We think the Teamshares model works well for certain general verticals. However, others will be more challenging, given the specificity of the industry, regulation or other operational constraints.
We are actively looking at investing in vertical focused models of Teamshares here in the U.S. or more general ones globally.
4. Small businesses are the lifeblood of the economy. New technology players help them stay small and become employee owned
“There is a path to a more inclusive and stronger economy underpinned by employee ownership”[15] You would probably not guess this quote is from KKR. Peter Stavros, Co-Head of Global Private Equity at KKR who is actively building a coalition to support employee stock option plans (ESOPs) across U.S. companies.
There are three main forms of employee ownership in the US: ESOPs, Employee Ownership Trusts (EOTs) and Worker Cooperatives. These have a number of advantages. Without getting into the deep nuances, we prefer trusts and ESOPs – with a marginal preference towards ESOPs given their history and tax advantage (subject to change as we continue learning).
Yet in the U.S. there are only ~6,300 ESOP owned businesses[16] (and a similarly small amount of EOTs and worker cooperatives). In theory, ESOPs seem like a very appealing option even for SMBs looking for an exit strategy. However, they are typically very complicated to setup and manage, plus, they are highly regulated which is often a disincentive for their wider use. That’s why these models have historically only been implemented for “Medium” sized businesses, and rarely in “Small” ones in SMB lingo.
New technology platforms are being developed to facilitate direct ownership transitions to employees, democratizing ownership and helping ensure business continuity while fostering employee engagement. These companies include Common Trust, focused on facilitating EOTs set up and Village Labs, offering services and technology for ESOPs setup and management.
This category of emerging companies includes solutions offering software to streamline the setup and operation process of ESOPs, or implementing equivalent figures like income trusts that can more easily be automated and are less regulated. We expect a range of other tools to be offered – similar to Teamshares’ stack for brokers to support owners.
The space remains early but we expect some breakouts in the years to come.
Challenges to these silver tsunami tech solutions and the coming retirement wave
We believe these models offer compelling options for SMB owners, and the percentage of successful transactions among SMBs will very likely increase in the coming years.
But there are real challenges to consider.
Transparency of data
Lack of trust between a prospective buyer and the seller is a perennial challenge for transactions with information asymmetry (the lemon problem with cars). Making the entire process transparent is fundamental to successfully close deals and connect the right sellers with buyers. Al though for certain specific sectors there are available softwares that buyers can plug into to get actual numbers from business operations, platforms will need to ensure the accurate and secure sharing of financial and operational data between buyers, sellers, and employees for every transaction.
Smaller is not easier
Brokers often shy away from smaller transactions. One reason is that the payoff is generally structured as a percentage, favoring larger deals – and that the workload does not materially differ. Arguably, smaller deals have less formality already in place – across reporting, hiring, governance etc. As a result, smaller deals can actually be more complex.
Emotions & trust
For small business owners selling their companies might be a once in a lifetime experience, highly impacting their legacy and financial retiring situation. Hence, trust is crucial. These deals are fraught with very valid emotions. Without it, sellers won’t agree to grant platforms access to their financials, act as their advisors, help them pick the right buyer and take an offer. This is particularly important when sellers finance is added to the transaction as the seller is essentially relying on the buyer to meet the deferred payment terms over time.
Financing
Financing SMB acquisitions can be challenging, especially if the buyer is a non-financial investor like employees. Platforms will need to help buyers access appropriate funding options, and structure deals with less traditional solutions like seller notes.
Keeping owner involved
For every company, there’s a balance between keeping the owner involved to maintain value—especially in professional services like healthcare or law, where customer trust is tied to the owner’s presence—and providing a clear exit option. Platforms must structure transitions to allow the owner to stay long enough to ensure continuity, while also offering a well-defined path for exit when the time is right.
AI is not a panacea
AI can play a significant role in streamlining various aspects of the transition process. It can be used to match potential buyers or employee groups to businesses, assess valuations, and analyze financial data, making the process faster and more efficient. AI-driven insights could also help both parties identify the best acquisition or employee ownership models based on financial health and growth potential. But AI is not a panacea. Because trust, emotions and real bilateral cooperation is critical, humans won’t be going away just yet.
Conclusion: many small business owners have a new chance
We believe that over the next ten years, millions of businesses across the world will grapple with generational transfer and the silver tsunami in the coming decade.
Governments worldwide are already recognizing the scale of the challenge and are beginning to introduce public policies and legal frameworks to support these transitions. For instance, in Japan, the government has created policies to encourage employee ownership models, while European countries are offering tax incentives and advisory services to help SMBs plan their succession.
Attitudes among business owners are also changing. The Exit Planning Institute suggests there is an increasing awareness from small business owners to developing an exit plan. According to the Institute’s report, by 2013 only 34% of business owners were aware of their exit options, improving to 70% by 2023. Likewise, there is an increased use of outside advice to plan exit strategies, and having formal valuations has improved from only 18% by 2013 to 60% in 2023.
That’s why these innovative solutions are arriving at just the right time. These companies are tailoring their approaches to address the unique dynamics of their respective markets—whether through employee ownership models, AI-driven M&A platforms, or tech-enabled brokerage services.
These innovative solutions are not only helping SMBs navigate the complexities of succession but are also ensuring that the businesses continue to thrive, preserving jobs and economic stability in communities worldwide.
As these models evolve, they offer a promising path forward for SMB owners everywhere facing the challenge of transitioning their businesses to the next generation.
If you’re building in this space, or would like to compare notes, please reach out.
[1] https://www.prb.org/resources/fact-sheet-aging-in-the-united-states/
[2] https://www.forbes.com/sites/markhall/2022/01/25/unsexy-but-thriving-businesses-the-hidden-opportunity-gifted-to-us-by-baby-boomers/
[3] https://www.investmentnews.com/rias/over-a-third-of-us-advisors-plan-to-retire-within-10-years
[4] https://exit-planning-institute.org/National State of Owner Readiness Report
[5] https://www.score.org/princeton/resource/blog-post/current-rise-small-businesses-being-sold-over-next-10-15-years
[6] https://exit-planning-institute.org/National State of Owner Readiness Report
[7] https://single-market-economy.ec.europa.eu/smes/continuity-and-exit/transfer-businesses_en
[8] https://exit-planning-institute.org/National State of Owner Readiness Report
[9] https://tsginvest.com/insights/micro-private-equity-vs-traditional-private-equity
[10] https://exit-planning-institute.org/National State of Owner Readiness Report
[11] https://novastone-ca.com/docs/2024_Stanford_Search_Fund_Study.pdf
[12] https://www.scmp.com/news/asia/east-asia/article/3220838/he-made-us950-million-finding-successors-japans-ageing-business-owners-using-ai
[13] https://www.bizbuysell.com/news/media_factsheet.html
[14] https://www.teamshares.com/
[15] https://www.linkedin.com/posts/peter-stavros-1b3a633_exclusive-a-private-equity-executive-pushes-activity-7244295929829163008-5pas/
[16] https://www.nceo.org/articles/employee-ownership-by-the-numbers#:~:text=In%20total%2C%20there%20are%206%2C533,(456%20publicly%20traded%20companies).