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Boomers To Builders: Venture Capitals Next Frontier In SMB Succession
www.forbes.com
Thanks to Sarah Lamont and Jaylen Darling for their contributionsEveryone talks about the $84.4T great wealth transfer in the context of liquid assets expected to be passed down over the next 20 years. However, fewer people are addressing the $15.5T in private business wealth that is much more operationally complex and obviously harder to inherit.SBA Office of Advocacy, Cerulli Associates, Federal Reserve, F-Prime Analysis F-PrimeDespite retirement-aged owners (boomers and older) owning 63.1 percent ($9.78T) of the private business wealth $4.25T of which we estimate is distributed amongst small business owners with less than 500 employees the inherent problems of transferring this portion of wealth creates ample market opportunity for startups in this space to address.For instance, only about 52 percent of heirs claim to actually want the family business which is exacerbated by the fact that the smaller the business, the less likely owners are to engage in exit planning. Stats like these suggest that many retiring SMB owners will need to consider alternative exit strategies outside of passing down their business to their children. More and more retiring owners will likely be selling their business to external buyers, which comes with a vast amount of challenges and pain points for both sellers and buyers.The challenges and pain points that SMB sellers and buyers face are vast:Many SMBs lack the technical knowledge to navigate the sale process, especially valuations.The sale process can be a highly emotional process to navigate.It can be even harder to sell businesses in specialized industries.Sellers are unsophisticated and oftentimes are not natively digital, which adds to the challenge of discoverability for buyersBuyers and sellers take a long time to close deals thanks to lengthy clearing price negotiations, financing processes, transition planning, and more.The Current State of Play of SMB Succession StartupsF-Prime AnalysisF-PrimeNumerous players are adding value along the process of business ownership transfer from document preparation to deal execution. Acquisition marketplaces like Beacon, Get Acquired, and Tresle are aggregating demand and providing value through free valuation estimation calculators, access to advisors that facilitate deal transactions, and an anonymous listings platform that allows sellers to match with and approve prospective buyer inquiries.Companies like Boom are supporting companies in the early selling phase, helping owners with key management issues and valuation services to get businesses ready for the marketplace. Baton which just raised $10M in Series A funding and Tresles Plus product offers custom marketing assets for sellers; Beacon vets their buyers even going so far as to conduct background checks in specific cases; and Baton and Acquire.com provide a virtual data room to standardize document review and initial due diligence.Buyer-focused acquisition marketplaces are also providing unique value-adds. Companies like Private Market Labs leverage AI to gather a database of on-market small business deals for buyers. OffDeal leverages AI to match and connect buyers with the best off-market acquisition targets. Village Wellth boasts a financing solutions product, Aquirewell, that links buyers with advisors to review financials and structure deals as well as assess their lending readiness and find the best lending options by connecting them with multiple lenders. Boopos offers acquisition financing loans for recurring revenue businesses.Alternative Solutions Employee OwnershipAlternatively, business owners who dont want to sell their business to external buyers can consider employee ownership transfer as an alternative exit strategy. Employee ownership as an exit strategy refers to an owner selling their majority stake in the business to the employees either directly or indirectly. There are multiple types of employee ownership structures with the most common model in the US being Employee Stock Ownership Plans (ESOPs), with over 6,000 companies and favorable tax incentives.While each employee ownership type has its own tax and governance incentives, across the board employee ownership has shown to be a viable and compelling exit strategy that results in a preserved legacy and company culture and potential for ongoing involvement or gradual transition for the selling owner going through an already emotional process of selling their business.Common Trust is one startup that is taking advantage of the market opportunity by helping owners design and execute an employee ownership buyout using a customized purpose trust an Employee Ownership Trust (EOT) that is cheaper than its more regulated ESOP counterpart. Startups in the space have the opportunity to get in front of selling owners who value company legacy preservation, tax benefits, and the flexibility of selling internally vs to external buyers.F-Prime AnalysisF-PrimeOn the other hand, the not-so-pretty side of business ownership transfer is that not all of them succeed. Companies like SimpleClosure and Sunset are addressing the clean up process for a sliver of the 80 percent of businesses that dont survive by efficiently managing the dissolution process for owners.The Opportunity for SMB Succession StartupsTraditional expectations of business owners to pass down their companies beyond generations are insufficient to deal with the impending demand of millions of business owners seeking retirement over the next decade. While the private business wealth transfer is well over trillions of dollars, numerous startups are adding value for selling owners and prospective buyers that are cheaper and more efficient than a traditional broker and go beyond a standard classified ad posting.The business wealth transfer space has never been more exciting, yet it needs serious investment in new infrastructure to scale and improve the investor experience. For entrepreneurs whove also spotted this opportunity, now is an opportune time to build category-defining companies.At F-Prime, we have been partnering with the builders of fintech infrastructure for more than 50 years, including early investments in Alibaba, Flywire, Toast, Quove/Plaid, Vestwell, and FutureAdvisor/BlackRock. We could not be more excited by the opportunity we see in business ownership transfer, and the chance to partner with the founders who will define this category. Here, weve outlined one view of how this industry is shaping up.
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