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Global Trends Impacting Private Business: Generational Wealth Transfer of the Next 10 Years

As the baby boomer generation reaches retirement age, we're on the brink of the largest wealth transfer in history. It is projected that between now and 2045, a total $84.4 trillion in assets will be transferred to heirs, while $11.9 trillion will be donated to charities, based on the net wealth of the baby boomer generation. This wealth will include real estate, financial assets and family-owned small businesses. This unprecedented shift in wealth holds significant implications, both opportunities and risks, for small businesses and entrepreneurs across the USA.


The Opportunity:

No doubt that this massive wealth transfer presents many opportunities for the next generation to take ownership and leadership of family-owned companies and to pay off debts and obtain funding for their new ventures from the inheritances.


There are also ample opportunities to buy small businesses from retiring entrepreneurs: people who are eager to sell and who might be willing to sell thriving businesses for less due to the need and desire to retire. This can create opportunities to buy long-established, incumbent businesses and create new growth in them. It’s also an opportunity for consolidation and growth through acquisitions. The current business interest rates are at a 14 year high and it is unclear how soon we might see recovery. The high cost of servicing a high interest business loan will mean that in the near term buyers with cash or healthy cash flow in the buyer’s business will have choice and leverage.


Another item of note is that with the generational wealth transfer there is also a historic transfer of wealth to women. There is ample evidence that women investors invest differently than their male counterparts. Some examples include investing more into female founders, investing more into companies with strong missions, social impact, and sound ethics, while also being more through in research, data analysis, and risk assessment of their investments. This shift might present a breakthrough era for female founders and for impact investment companies.


The Risk:

However, there are more than opportunities to consider. Economist Carol Roth (2023) predicts that there will be political attempts to tax and regulate this wealth transfer to pay off government debts or otherwise take advantage of the moment. In fact, such proposals have already begun to be discussed in congress, like the “unrealized capital gains” tax proposal made last year. Whether you stand to benefit from an inheritance or not, private business owners and aspiring entrepreneurs should follow this trend and look out for policies that affect ownership transfer in small businesses and new methodologies for taxation of assets.


Another trend greatly accelerated by the buyers’ market dynamic is the ongoing consolidation of industries into the hands of the most dominant players. For example, aggressive M&A activity has been observed in the Healthcare Providers and Space & Defense Industries. “In the last two decades, over 75% of U.S. industries have experienced an increase in concentration levels,” writes Grullon et al. (2018). “Overall, our results suggest that the nature of U.S. product markets has undergone a shift that has potentially weakened competition across the majority of industries.”


Recommended Strategies for 2024


Plan Your Succession

Ownership transfer and leadership transfer are complex and difficult to get right. For entrepreneurs looking to sell as they approach retirement, we recommend identifying multiple potential routes to succession and exploring them 2-3 years ahead of the sale. Investing in coaching the next generation of leadership within their companies, or their families, might be a better assurance of retirement than relying on selling alone.


For entrepreneurs looking to transition the business to a family member, preparation for a transition needs to start early, ideally years before the current owner and leader retires. The transition should include training and evaluation for the future leadership, a plan for governance, and a strategy audit to help formulate the vision for the company under new leadership.


“No competitor, technological disrupter or economic downturn is as great a threat to family business survival as the transition from one generation to the next. We know that on average only two-thirds of family businesses make it to the second generation, and with each subsequent generation, that ratio continues to fall.”

Last but not least, ensure you have expert help as you navigate and prepare for the wealth transfer. You want to have someone who can educate you and your successors and structure your business and its wealth so that the tax burden and disruption during the transfer are minimized.


This will likely be a buyers’ market for business sales, and as a result, buyers can also consider strategies that improve the success of the leadership transfer by negotiating longer transition periods with the seller.


Focus on Cash Flow and Operational Tightness

Selling a business in a competitive market during a period of high interest rates will present new challenges. Having your financials in order means not only clean accounting but also good data analysis that will assure the buyer that, even with a higher service rate on business loans, the business will be sustainable. It also means good operational discipline focused on improving cash flow will be a competitive advantage for a seller. This includes developing accurate cash flow projections, optimizing working capital, and implementing effective invoicing and collection processes. You might also consider other levers such as consolidation or refinancing of variable debt and cost cutting.


Grow Through Acquisitions

In a buyers’ market, businesses that have cash have greater choice and leverage for growing through acquisition. Not only does acquisition add to your own business, but it also prevents competition from expanding and dominating you. Mergers and acquisitions are very risky, especially when the acquired company has a strong culture of innovation and creativity. However, evidence suggests that small deal sized acquisitions tend to be more successful than large acquisitions. The smart businesses will take advantage of these market conditions and should begin by evaluating their purchasing capacity and outlining some ideas on what types of acquisitions would be strategically advantageous. Growth can be achieved through geographical expansion, addition of new products and market segments, or improving the overall brand and audience reach.


 

About the Global Trends Impacting Private Business series:


Change and disruption can impose itself on a business due to changes in economic conditions, policy, emerging technologies, and behavioral shifts in society. You cannot change the weaving of the pattern, but paying attention to the shifting context in which your business operates is a sensible practice if you want to be able to adapt to it. You might see opportunities or risks and use foresight to continue to operate successfully despite the disruption.


The StratCraft Global Trends Impacting Private Business series explores important shifts in the landscape that will be affecting small and medium sized, privately owned businesses in the United States. StratCraft Partners provide timely, actionable, and well researched strategy advising and strategy implementation services to growing businesses.

 
Sources:
  1. Cerulli | Press release: Cerulli anticipates $84 trillion in wealth. . . (2022, January 20). Cerulli Associates. https://www.cerulli.com/press-releases/cerulli-anticipates-84-trillion-in-wealth-transfers-through-2045

  2. Tepper, T. (2023, July 26). Federal funds rate history 1990 to 2023. Forbes Advisor. https://www.forbes.com/advisor/investing/fed-funds-rate-history/

  3. Baghai, P., Howard, O., Prakash, L., & Zucker, J. (2020, July 29). Women as the next wave of growth in US wealth management. McKinsey & Company. https://www.mckinsey.com/industries/financial-services/our-insights/women-as-the-next-wave-of-growth-in-us-wealth-management

  4. Maschek, J. (2023, June 5). Women’s wealth is growing faster than ever. The Quantum Group. https://thequantum.com/womens-wealth-is-growing-faster-than-ever/

  5. Graham, J. F., Stendardi, E. J., Myers, J. K., & Graham, M. (2002). Gender differences in investment strategies: an information processing perspective. International Journal of Bank Marketing, 20(1), 17–26. https://doi.org/10.1108/02652320210415953

  6. DuBow, W. (2020, January 13). The Comprehensive Case for Investing More VC Money in Women-Led Startups. Harvard Business Review. https://hbr.org/2017/09/the-comprehensive-case-for-investing-more-vc-money-in-women-led-startups

  7. West, C., & Sundaramurthy, G. (2020, March 25). Women VCs Invest in Up to 2x More Female Founders | Journal | Kauffman Fellows. https://www.kauffmanfellows.org/journal/women-vcs-invest-in-up-to-2x-more-female-founders.

  8. Williams, A. (2023). Women lead the way with ethical investments. Moneyweek UK. https://moneyweek.com/investments/women-lead-the-way-with-ethical-investments

  9. Roth, C. (2023). You Will Own Nothing: Your War with a New Financial World Order and How to Fight Back. HarperCollins.

  10. 10. Morales, I. M. O. (2022, May 23). The Hill. The Hill. https://thehill.com/opinion/finance/3487486-bidens-tax-on-unrealized-gains-will-hit-far-more-taxpayers-than-he-claims/

  11. Brennan, P., & Hudgins, C. (2023, January 17). Market-leading US companies consolidate power in era of “superstar” firms. S&P Global Market Intelligence. https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/market-leading-us-companies-consolidate-power-in-era-of-superstar-firms-73773141

  12. U.S. Department of Defense, & Lopez, T. (2022, February 16). DOD report: Consolidation of Defense Industrial Base poses risks to NA. U.S. Department of Defense. https://www.defense.gov/News/News-Stories/Article/Article/2937898/dod-report-consolidation-of-defense-industrial-base-poses-risks-to-national-sec/

  13. Grullon, Gustavo and Larkin, Yelena and Michaely, Roni, Are U.S. Industries Becoming More Concentrated? (October 25, 2018). Forthcoming, Review of Finance, Swiss Finance Institute Research Paper No. 19-41, Available at SSRN: https://ssrn.com/abstract=2612047 or http://dx.doi.org/10.2139/ssrn.2612047

  14. Weishaupt, M. (2020). 10 capital succession errors and 10 ways to avoid them. Tharawat Magazine. https://www.tharawat-magazine.com/grow/10-capital-succession-errors/

  15. Glaze, A. (2023, January 31). How rising interest Rates Can Hurt—Or Help—Businesses. Forbes. https://www.forbes.com/sites/forbesfinancecouncil/2023/01/31/how-rising-interest-rates-can-hurt-or-help-businesses/?sh=6fefd46d24f0

  16. Bradley, C. (2018, May 9). Research Shows That Smaller M&A Deals Work Out Better. Harvard Business Review. https://hbr.org/2018/05/research-shows-that-smaller-ma-deals-work-out-better

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