There is a silent crisis threatening the American economy, one that the next startup boom or stock market surge can’t resolve. This is the “Silver Tsunami,” a slow-moving wave of small business owners who are preparing to exit or close their businesses.
This demographic shift is seismic. Over half of U.S. small business owners are 55 or older, and by 2030, the entire Baby Boomer generation, which owns roughly 30% of the nation’s 35 million small businesses, will be 65 or older. Because of this, in the coming decades, millions of companies will be sold or disappear. As a result, there will be tremendous job losses, community turmoil, and loss of wealth.
These entrepreneurs face a stark dilemma: how to exit their business, secure their financial future, and preserve their legacy?
The traditional solution for retiring owners is to sell to an outside buyer (often a competitor or private equity firm focused on cost reductions), sell to a family member, or close their business completely. Regardless, whenever a local coffee shop or a manufacturing plant closes, jobs are lost, significant institutional knowledge is removed, and tax revenue shrinks.
There is, however, a powerful, innovative solution emerging across the country: transferring ownership directly to employees. In addition to preserving jobs and legacy, this approach creates better jobs, reduces the wealth gap, and strengthens communities.
The Succession Crisis: What’s at Stake?
A small business is not simply a smaller version of a large corporation. Instead, they’re the bedrock of the American economy, employing nearly half of the private sector workforce. Suffice it to say, whenever a small business closes because of a lack of buyers, a mini-recession is triggered. In turn, this creates three substantial threats.
Loss of quality jobs and institutional knowledge.
In addition to providing stable, well-paying jobs, local businesses preserve crucial institutional knowledge. In other words, when a specialized manufacturing plant closes, it doesn’t just affect 40 jobs. This is about 40 careers requiring specialized skills that are difficult or impossible to replicate. Over the years, expertise has been built up, but it has now been lost.
Local wealth erosion.
Often, when a business is sold to an outside company, the profits and future cash flow are sent to a headquarters outside the state. As a result, local wealth creation ceases, and key economic engines are lost in the community.
The end of a legacy.
Having put decades into a business, it’s often heartbreaking to watch it dissolve or be acquired by a private equity firm and dismantled. After all, seeing their life’s work thrive is the greatest desire of entrepreneurs.
Thankfully, employee ownership (EO) models directly address all three threats by turning succession into a wealth-building opportunity.
New Models for the Transfer of Power: The Employee Ownership Revolution
While the concept of employee ownership isn’t new, it has undergone a revolution as the most viable and effective solution to the “Silver Tsunami.” Employee Stock Ownership Plans (ESOPs) and Worker Cooperatives have proven to be successful models for business transition.
Employee Stock Ownership Plans (ESOPs)
For their powerful tax and financial benefits, employee stock ownership plans are the most widely adopted form of employee ownership.
How an ESOP works.
As an owner retires, his or her shares are transferred to the ESOP trust, which holds them on behalf of the employees. In this trust, employees receive shares free of charge, effectively funding their retirement plans. The company usually takes out a loan to finance the purchase, which it repays with pre-tax dollars, thereby boosting its cash flow significantly.
The ESOP Win-Win-Win
- A retirement gift for the owner. By selling their shares, the owner gains liquidity. Under certain conditions, they may be able to defer or even eliminate capital gains taxes on the sale, maximizing their return on a lifetime of work while preserving their legacy.
- For the company’s benefit. By offering this valuable asset, the company increases recruitment and retention rates. As a result of the tax benefits, cash flow is reinvested directly into the business, strengthening its financial standing.
- Ownership by employees. The employee gains a valuable, growing asset. According to studies, ESOP employees have significantly higher retirement account balances than their non-ESOP counterparts, democratizing wealth.
The Workers’ Cooperative
Democracies and egalitarianism are the hallmarks of worker cooperatives. For small businesses and organizations with a natural, democratic culture, they’re an ideal fit, even if they are less common for substantial transactions.
How a co-op works.
Co-ops are owned directly by their employees. Regardless of position or investment amount, every worker-owner receives one share and one vote. Patronage, which refers to the amount of time an employee works, is often used to distribute profits.
The cultural advantage.
As a result of this model, a hierarchical culture is fundamentally transformed into a democratic one. As “worker-owners,” employees are intrinsically invested in the company’s long-term success, efficiency, and sustainability. By participating in strategic decisions, they gain an immediate voice, which encourages a culture of quality and deep engagement.
The Triple Bottom Line: Benefits Beyond the Balance Sheet
In addition to the financial records of the company, employee-owned companies have a wide range of impacts. Among the most powerful forces for local resilience is economic development.
Job stability and local roots.
When a company transitions, it’s exponentially more likely to remain at its original location than an employee-owned one. Typically, employee-ownership is deeply rooted in the community in which they live, send their children to school, and rely on the town’s prosperity for their financial health. In turn, EO employees are 6 times less likely to be laid off than employees of traditionally owned companies, thereby preserving local jobs and fostering economic stability.
Building generational wealth.
In addition to closing the wealth gap, employee ownership has other profound effects. ESOPs are a vital, accessible source of wealth accumulation for low- and moderate-income workers without access to traditional investment vehicles.
As employees become directly involved in creating value, these models transform families’ economic landscapes. Compared to non-owners, employees of color and women, in particular, are likely to earn more and accumulate more wealth.
Enhanced performance and productivity.
Providing employees with a direct stake in the company’s success is a motivating factor. Research consistently shows that employee-owned companies are more profitable, productive, and grow their sales faster than non-EO companies.
When workers know that their retirement account value depends on meeting a deadline or providing excellent customer service, they act like owners. In the long run, this increased engagement, innovation, and commitment improve the company’s health.
Conclusion: Securing the Next Generation of Local Business
As Baby Boomers retire, the American economy faces a critical window of opportunity to restructure our small businesses fundamentally.
With ESOPs, worker cooperatives, and other tailored models, we’re building a more resilient, equitable, and community-minded system. In addition to ensuring their legacy endures, this is the most ethical and financially sound way to monetize their lifetime work.
Through the adoption of these models, we aren’t just solving a succession issue. As a result, we empower the workforce to run their businesses, create wealth for their families, and enhance their communities for generations to come. In the end, investing in today’s employees is far more critical than finding the next outside buyer.
Image Credit: Tima Miroshnichenko; Pexels
