We all know that we expect an unusually high number of people to retire in the next few years. The Baby Boomers have already started the process of retirement and are continuing to retire in what looks like a tsunami. But how could this result in higher unemployment numbers?
You can see below graphically that the retiring generation (Baby Boomers, shown in green) is much larger in numbers than the generation which would be buying these businesses (Generation X, shown in red). Also, Generation X is statistically far less likely to buy or run businesses. And then, the younger Generation Y statistically is drastically far less interest in buying or running a business than even Generation X did. But this is only part of the crippling problem of why 95% of businesses listed for sale do not sell in the first year, and why 90%-95% never sell. Why don’t these generations want to own their own businesses?
Small and Medium businesses account for about half of the jobs of the US economy. These are dynamic businesses that grow fast, they employ 5 to 500 people, but they are also difficult businesses to operate.
“Usually, the founder is part of the business’ identity, who, more times than not, is the head of operations of the business, as well, as its CEO,” says Matt Williamson, CEO of Founders Trust. Founders Trust is a white knight company. “We buy companies not to dismantle, sell, or conglomerate them, but to grow these businesses. I have never heard of any group that does what we do.”
In most Small and Medium businesses, the founder runs the business, and he does it in a way that doesn’t prepare members of his team to be the future leaders who are able to run the business one day themselves. Succession, or the sale, of this kind of businesses, is difficult. The statistics show that only a very small percentage of businesses of this type, that list for sale, ever sell at all.
But how could that negatively affect the unemployment numbers? Mr. Williamson of Founders Trust explains: “The answer lies in what happens to all these businesses that fail to have succession or sale. Usually, what happens is one of the following scenarios”:
- The founder has done very well for himself, and he stays on for much longer than his useful work life. He gradually loses interest, and the daily routine becomes a habit, a hobby, his daily entertainment. He doesn’t even care for a sale or a succession. No price is good enough for a sale and no candidate is good enough to take over for him. Since he doesn’t need to do it, he just keeps operating the business and gradually downsizes until one day he is unable to run the business anymore or passes away. The business closes down immediately. In this scenario, jobs decrease gradually over time and at the end, suddenly, all the jobs are gone.
- In the following scenario the jobs decrease abruptly. Again, the founder stays in operation for much longer than he should have, and he has no plan for succession. When it is obvious that a solution is needed, the founder doesn’t have the time or the luxury to find the best buyer for his creation and he sells to the first buyer that comes along. Usually, that is his competitor or another business in his industry. One of the results of this scenario is the following: These types of buyers tend to keep the clientele, maybe some equipment, and a few of the employees, and they dispose of everything else, including the name of the business and the majority of the employees. Soon, it is like the business never existed. The founder’s brand and legacy are gone, and a large number of jobs are gone too.
- In the third scenario, the founder has been at the helm for a long time, but his successors haven’t been prepped properly. Nevertheless, at this point in the game, time is pressing. The successors, usually family members, are either not ready or not willing, so they take over out of obligation, or they are willing but just don’t have the thousands of days of practical, hands-on, “messy real-life problem-solving creativeness under pressure” experience to step into a leadership position like that and take responsibility. Usually, this type of leadership fails and results in an abrupt loss of jobs.
We have looked at three ways that succession challenges can cause destruction of the life’s work of the founders as well as higher unemployment in the job market. What could the founders of these companies have done to avoid these catastrophes?
They could have planned in advance to sell their businesses to parties who would continue to let the business operate independently, with its own management, and who would keep all the employees and the name, brand, identity and culture of the organization, find ways to grow the business, and allow the founders to one day be proud of their legacy.
Admittedly, this is not an easy task, especially since the founders already have their plates full running their businesses. Now, however, is the time to start planning.
“When a company goes public, even the largest companies, there is usually the need to have the founder continue running the business, for a long time” explains Williamson. “The reason this is so important is that even large companies can drastically decrease in value when a different leader is at the helm. Certainly, small companies do not experience this less than large companies”. So this is one of the main problems of retiring sellers.
Williamson says, “This is often a problem because whether it is a $200 million or a $20 million business, the founder often waits long after his exhaustion point to finally give up and sell, so that he is ready to retire at the same time“. How do you get the word out to founders that they need to stay on for a few years for a stable, smooth transition period with the new ownership structure? The lack of knowledge in this regard has such a negative effect on the economy, and the products and services that are available to people, with so many high quality companies going out of business.”
But there are certainly options. Founders Trust understands these issues, and solves them. Founders Trust gives ownership to current employees and makes them part of the dream. A solution like this not only contributes to keeping employment levels high, but also makes the founder happy, and makes his employees happy, too. “We work with the founders, and together we find solutions that will work for both the current owners and us as the new owner” says Williamson, “Founders have the opportunity to stay with the company and keep leading it as the chief executive, or they can even stay on as partners. The founder of the business can be sure, either way, that when he retires, he will do so comfortably, and the people who helped him grow his business will be able to retire comfortably, too.”
But the problem remains that few people have heard about the need to plan ahead for their succession. The mission of Founders Trust is to help as many owners and founders to do this in a way that will ensure a lasting legacy.