Saving American Businesses from the Silver Tsunami

Waves and Life Preserver

July 31, 2023 Lawrence Kaplan

The United States is greying. According to the Social Security Administration, 76 million Americans will be 65 or older by 2035. That’s up from 58 million in 2022. 

This "Silver Tsunami" represents a high stakes moment for the US economy, and its impact will likely ripple through every corner of society. Private companies are particularly vulnerable. Nonetheless, if America is to successfully navigate the approaching storm, these companies must endure.  


Americans Over 55 Own Half of all US Businesses

These 2.9 million companies – ranging from mom-and-pop outfits to middle market firms – account for 32 million employees, according to Project Equity. Combined, they take home $1.3 trillion in wages and generate roughly $6.5 trillion in revenue each year.

Communities Depend on Closely-Held Companies

For every $100 spent at a local business, approximately $68 stays within the local economy. A recent survey by US Chamber of Commerce puts an even finer point on how these companies give back.

  • 70% of surveyed businesses encouraged employees to shop at other local businesses
  • 64% sponsored or donated goods or services to local events
  • 56% offered discounts to community groups and organizations

The tax revenue generated by local companies reliably fund public services and infrastructure. Civic pride is also closely linked to successful, home-grown businesses.

Local Closures, Broad Consequences

When private companies leave a community, residents typically fail to find equivalent work and governments struggle to fill budgetary gaps. Mounting business closures, and waves of retirees falling off payrolls, will likely have a compounding economic impact. 

Academics Erika James and Lynn Perry Wooten describe this as a "smoldering crisis." Job losses, associated wage compression, and an aging population, will gradually increase social welfare dependency. Despite a need for additional government resources, diminished income tax revenues will likely erode the social safety net and put added pressure on for-profit service providers. 

A Sink or Swim Moment

Between 2000 and 2020, the number of business owners at full retirement age increased by 87%. That number continues to rise as the Silver Tsunami gains momentum. Meanwhile, more and more business owners have signaled their intent to sell and retire.

Yet roughly 67% of lower middle market owners who put their businesses up for sale in 2022 did not have a formal exit plan in the prior year. Without a plan, owners run the risk of subpar transaction pricing, selling under duress, or struggling to find a buyer at all. Shifting market conditions, and declining interest in generational succession strategies, have made sensible exits harder to attain.


Employee Stock Ownership Plans Offer a Safe Harbor

A legislative "cousin" of the 401(k), an ESOP is an ERISA-authorized, defined contribution program. Unlike other retirement plans, ESOPs offer participants stock in the companies for which they work, rather than third-party investments.

While plan sponsors can contribute shares directly to an employee stock ownership trust, equity can also be sold to a trust at a fair market valuation. The latter strategy, known as a leveraged ESOP, enables shareholders of closely-held businesses to gradually divest from their companies or execute a complete liquidity event. As a result, the ESOP can function as a business exit or succession vehicle.

Putting a Premium on Independence and Continuity

Unlike a third-party sale, an ESOP-owned company’s board of directors continues to manage the business. Meanwhile, employees not only keep their jobs, they earn annual stock allocations at no out-of-pocket cost.

Selling shareholders often choose to maintain meaningful roles. Some continue as guiding figures. Others gradually phase out their day-to-day responsibilities and help pass the helm to a next generation of leaders. In many respects, the stability afforded by an ESOP reflects that of a generational transfer – just to a bigger “family.”

Unique Competitive Advantages

ESOP-specific tax deductions enhance corporate cash flow, while the employee stock benefit often bolsters a company’s ability to hire and retain staff. The potential for stock appreciation drives increased productivity and helps strengthen company culture.

Of course, these advantages can't be expected to keep a struggling company afloat. There are also meaningful costs associated with forming and maintaining an ESOP. But an already productive business should be better positioned to navigate the Silver Tsunami under an employee ownership model. That could be a boon for both loyal employees and their broader communities.

Future-Focused Flexibility

Even when a business lacks a fully articulated succession plan, a partial ESOP sale can create shareholder liquidity while preserving strategic flexibility. That’s because companies have the freedom to engage in subsequent transactions including secondary ESOP sales, stock buybacks, and plan terminations. Third-party M&A also remains an option.


Recent History Underscores the Silver Tsunami's Potential Impact

As recently as the late 1990's, companies with less than 500 employees employed more than half of the US private sector labor force. That percentage dipped to 46.4% in 2019. By all initial accounts, the Coronavirus pandemic accelerated this trend.

Roughly 35% of small businesses active prior to the pandemic remained closed as of May 2021. Those that stayed afloat were more acutely challenged by price increases, labor shortages, and higher borrowing costs than their larger competitors. Small business sentiment has waned, and local economies have been uniquely impacted.

If the past is prologue, the Silver Tsunami is a credible threat to America’s closely-held business community. Millions of working-class Americans are relying on aging business owners to craft thoughtful exit and succession plans.

Business owners, and their trusted advisors, can still get ahead of the wave, but now is the time for creative planning and new ideas. A fresh look at employee ownership could be a saving grace for private companies and the communities they call home.

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