How Small Businesses Can Hurt the Economy - NYTimes.com

Few people have the perspective that business brokers do on just how close some small businesses can come to closing their doors. Transferring business ownership is a delicate process at best, whether the business is sold to a third party or handed off to the next generation. Success can easily be derailed by any number of variables, from financial realities to emotional perceptions.

While some businesses soldier on, the result of many failed sales is the inevitable winding down and liquidation of the business. When I see the writing on the wall, I know what it will mean to the owner but I am also aware of how it will affect the local economy. I recall one particularly difficult deal that closed by the skin of its teeth back in 2010. The owner had never given a thought to selling the business until he was looking down the barrel of personal bankruptcy. If that deal hadn?t gone through, nine landlords would have lost retail tenants, $5 million in sales would have vanished and 43 jobs would have disappeared.

My own little coffee business was recently shuttered after six years with the new owner. That meant three locations closed, 16 mobile units liquidated and at least 14 jobs lost by my count. According to a new study by BizBuySell, continued sluggishness in the business succession marketplace resulted in 308,000 fewer jobs added to the economy in 2011 and $11.5 billion in lost investment and consumer spending.

Other than with my husband, I have had few conversations about how the failure to build a business with transferable value affects local economies. But I recently received a LinkedIn message on this topic from Chuck Richards, founder and chief executive of Chairman?s View and creator of CoreValue business-assessment software. In addition to engaging in four start-ups and two turnarounds, Mr. Richards studied economics at Williams College and earned degrees in business and engineering from the Massachusetts Institute of Technology. The following is a condensed version of several recent conversations.

Q: Tell me what happened to the town you grew up in.

Mr. Richards: Springfield, Vt., was a small town of about 10,000 folks and one of the world?s leading machine tool centers, with close to 5,000 well-paid manufacturing and management jobs. The prosperity built wonderful schools, opportunities for kids and a small town with a tight social fabric. The machine tool businesses began to disappear during the 1970s. By the 1980s the jobs had dried up and a vibrant community imploded.

Q: What was your reaction?

Mr. Richards: Living with the real social cost of lost jobs and economic collapse changes your view of the world, and it compelled me to search for answers.

Q: And you came to believe that the problem is related to the inability to sell small businesses?

Mr. Richards: Most businesses have little value beyond their balance sheet or profit-and-loss statement and cannot be sold as an ongoing operating business. They lack the processes and infrastructure to dependably generate revenue and profit going forward, especially without the current business owner in charge. As a result, the owners get tired, and without options, they simply close. Some businesses can be sold for their hard assets, intellectual property or profits and the buyer strips them. Springfield saw both.

Q: What?s the alternative for these businesses?

Mr. Richards: If businesses are treated as long-term, stable assets ? with sustainable and transferable revenue and profit ? the economic landscape changes. And it happens one business at a time. We grow and protect our economy from the bottom up.

Q: Is this a problem beyond Springfield?

Mr. Richards: Today we face thousands of potential Springfields. The demographic wave of retiring baby boomers means across this country each and every town will go through a business-transfer challenge. There are about 5.9 million private businesses with employees in the U.S. The demographic wave is clear in the numbers, as over four million are owned by baby boomers nearing retirement. These businesses generate $6 trillion in revenue and represent over half the U.S. job base. They fuel more than half our G.D.P.? So half our job base is going through a transition where historically only one in four businesses are successful in transferring.

The sale of a business is the retirement plan for most boomer business owners. Let?s say each business was worth an average of a million dollars; we would be talking over $4 trillion in potential wealth. If only one in four sells, we would lose $3 trillion in wealth. It just evaporates. We are talking about millions of jobs; we are talking about lost retirements; all on the line if we do not fix the transfer problem.

Q: What can business owners do to keep their businesses ? and their communities ? intact after they exit?

Mr. Richards: Here?s the good news. We know if you transfer a business well, it grows and creates jobs. We know new blood in old businesses is a shot of adrenaline, with new energy, new technology and a focus on the future. For the first time in three generations we have the chance to reinvigorate our economy with new blood. The boomers have the opportunity to transfer their businesses to the next generation in a way that grows the economy. It all starts with defining success as value, not profit.

Barbara Taylor is co-owner of a business brokerage firm, Synergy Business Services, in Bentonville, Ark. You can follow her on Twitter.

Source: http://boss.blogs.nytimes.com/2012/02/16/how-small-businesses-can-hurt-the-economy/

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