Hundreds of thousands of small and medium-sized businesses (SMBs) will change hands in the US as older owners look to retire. The Small Business Administration estimates that around 10 million businesses owned by Baby Boomers will exchange hands between 2019 and 2029. This is nothing less than a “Silver Tsunami”, a term we’ve featured before.
(Image credit: Downtown Milan Michigan, by Notorious4life, Creative Commons Public Domain Licence.)
However, this phenomenon is not limited to the US. A recent analysis by Eilla, a sell-side broker based in the UK, shows that Germany will be one of several European countries to be hit the hardest. Staggeringly, 2.5 million SMB owners are over 55 today, and KfW, the federal development bank, warns there are nowhere near enough younger buyers ready to take over.
Japan’s business transition is impacted even harder, with 2.5 million business owners being over 70 - half of whom have no identified successor.
The challenge presents itself both in quantity and in quality. For many owners, the knowledge that their company is left in good hands matters just as much as the price they receive. Having children does not guarantee a willing successor, and many senior owners find themselves without one.
In a Substack post I suggest everyone should read, 8VC’s Joe Lonsdale and Denis Aven consider different approaches to the Silver Tsunami. In the last few years, and I have extended their analysis a little, we have seen three approaches that enable generational transfer. Yet all three are just partial solutions. In their eyes, there is a different solution, but first, let’s break it down.
Roll-ups
Private equity is normally too large for a single small business, but not if dozens are combined into one. The combination creates synergies, which in turn creates better margins and roll-ups are getting a great deal of attention right now. I hear about someone in my network launching one almost every week now, but they are not a universal solution for generational transfer. They only work in specific segments where scale and synergies can be readily created, and some owners do not want their business absorbed into a larger entity. They want to preserve an owner-led, local identity.
Search funds
In the case of a search fund, an entrepreneur receives funding to find, acquire and run a single company, even before the target is identified. It is a really cool model with roots going back to Harvard and Stanford business schools in the 1980s. It is inherently relationship-based and difficult to scale. It cannot, on its own, address the thousands of retiring owners seeking successors.
Marketplaces
Today, there is an array of online marketplaces available. Web 1.0 gave us BizBuySell, a site founded in 1996, which is still active with 100,000 completed sales and 15 million monthly page views. European equivalents include DUB.de in Germany and BusinessesForSale.com in the UK. These platforms use blind listings to protect sensitive information, but a marketplace alone can only go so far. It provides data, but does not facilitate a direct transfer.
Selling a business is not like selling an item on eBay. A successful sale requires months of preparation: Structuring liabilities, negotiating earn-outs, managing employee transitions and much more. Finding a price both parties can accept is often the least complicated part. Without expert guidance on both sides, the process can be fraught.
Many advisors and funds are working to address this gap in innovative, scalable ways. Eilla AI supports sell-side advisors with AI-powered capabilities. In Japan, whose society is furthest along the generational curve, M&A Research Institute, a listed company generating over $100 million in annual fees, is scaling the broker model through a large team, advanced processes and AI, facilitating transactions on businesses with revenue as low as half a million dollars. In Germany, KERN operates similarly, with more than 40 offices across the DACH region. On the buy side, American Operator, backed by 8VC, is a marketplace that connects prospective business owners with locally sourced acquisition financing.
Kodiak Holdings, also backed by 8VC’s Joe Lonsdale, takes a different approach. It builds on the search fund model but replaces its relationship-driven, one-at-a-time character with a more efficient, process-oriented structure. There is no “secret sauce,” but instead a whole lot of process, tech, AI and data optimised to make a difference. Kodiak raises capital from LPs like any other equity fund, then deploys it across a portfolio of operators, each seeking to acquire an SMB.
“The key to our fund model is to tap into the supply of experienced operators and provide them with the funding they need to acquire their businesses. Our focus is on process and efficiency. We are adapting the search fund model to make it scalable. With our first fund, we aim to have dozens of companies in our portfolio.”
— Denis Aven, Founder, Kodiak Holdings.
Kodiak is just getting started, and if they execute well, their model could solve for the limitations of previous approaches and make a meaningful dent in one of the most important and most overlooked economic challenges of our ageing societies.