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The Coming Wealth Transfer: Baby Boomers, Business Succession, and the Challenges Ahead
As the Baby Boomer generation—those born between 1946 and 1964—enters retirement, the United States is poised for an unprecedented transfer of wealth. Over the next two decades, Baby Boomers are expected to pass down an estimated $68 trillion to their heirs and charities. A significant portion of this wealth is tied up in privately held businesses, many of which were founded or expanded by Boomers during the post-war economic boom. The impending transfer of these companies presents a complex set of challenges, not only for the families involved but also for the broader economy.
The Scale of the Transfer
Baby Boomers own nearly half of all privately held businesses in the United States. Many of these enterprises are small to medium-sized, yet they collectively employ millions and contribute significantly to the economy. According to a study by the Conway Center for Family Business, about 70% of family-owned businesses in the U.S. are expected to change hands within the next decade. However, only about 30% of these businesses successfully transition to the second generation, and a mere 12% survive into the third generation .
The reasons for this low survival rate are multifaceted. Many Boomer business owners have not adequately prepared for succession, either due to a reluctance to step down, a lack of suitable heirs, or insufficient planning. Additionally, the next generation may not have the same interest or aptitude in running the family business, preferring to sell rather than take on the responsibilities of ownership.
The Challenges of Succession
One of the most significant challenges in this wealth transfer is the succession process itself. For businesses to thrive beyond the original founders, careful planning and preparation are essential. Unfortunately, many Boomers have postponed these decisions, often due to the emotional and financial complexities involved. A PwC survey found that 58% of family businesses have no documented succession plan .
Even when there is a plan, execution can be problematic. Generational conflicts, differing visions for the company’s future, and the complexities of dividing assets among multiple heirs can create rifts within families. Moreover, the next generation may lack the experience or desire to run the business, leading to decisions to sell to external buyers or private equity firms.
Preparing for the Future
It is crucial for Boomer business owners to start planning as early as possible. This includes developing a comprehensive succession plan, identifying and grooming potential successors, and considering the tax implications of their decisions. For those without heirs interested in the business, exploring options such as employee stock ownership plans (ESOPs), mergers, or sales to trusted external partners may be viable alternatives.
Financial advisors, estate planners, and business consultants will play a critical role in helping Boomers navigate this complex transition. The success of this wealth transfer will have lasting implications, not only for the families involved but also for the broader economy.
The Role of Private Equity and External Buyers
The lack of suitable heirs ready or willing to take over family businesses has led to a surge in interest from private equity (PE) firms. PE firms see an opportunity to acquire well-established companies with solid cash flows at a time when valuations may be more favorable due to the impending wave of retirements.
Our sister company, Olivon Advisors, has partnered with and invested in a leading sourcing platform for lower middle market PE firms. SourceCo has ramped up its retained search throughout the past year and closed in excess of $1.1 mm in success fess during the first half ofg 2024. In the coming months, SourceCo intends to launch a marketplace focused on transactions too small for the lower middle market industry today. This Septemnber, SourceCo will present the first co-investment opportunities with their PE sponsor clients at Olivon Advisors’s Fall Investor Conference in Miami.
Sources:
- Conway Center for Family Business, “Family Business Facts,” 2023.
- PwC, “2023 U.S. Family Business Survey.”
- Forbes, “The $68 Trillion Wealth Transfer is Coming—What to Know Before It’s Here,” April 2023.
- Harvard Business Review, “Why Family Businesses Struggle to Survive Generational Transitions,” October 2022.