According to a 2019 survey conducted by Guidant Financial and LendingClub, only 4% of small businesses are owned by 18- to 29-year-olds. These findings showing low business ownership among younger generations are further supported by a Small Business Administration report that found that at age 30, fewer millennials said they were self-employed the previous year compared to Generation Xers and baby boomers at the same age.
What are the reasons for this diminished entrepreneurialism? There are likely many, but among the broad reasons would be lack of know-how. So, the question becomes: How can we unlock the potential of millennials who perhaps have entrepreneurial will but lack the necessary business acumen and knowledge?
Naturally when people talk about millennials owning businesses, they often think of startups and likely have some prominent examples in mind, such as Mark Zuckerberg or Reddit’s Alexis Ohanian, who started their businesses while in college. Yet starting a business is only one path to entrepreneurship. Another is buying an existing business.
For aspiring entrepreneurs, there are some advantages to buying an existing business:
• The business has a track record.
• Typical startup challenges have been overcome.
• Previous business owners are able to pass along insights and expertise.
As baby boomer entrepreneurs retire and sell their businesses, the business ownership possibilities for younger generations will open up. With this in mind, there are two factors that prospective entrepreneurs should consider: financing the purchase and executing the deal.
In terms of financing, there have always been challenges to raising money to start or buy businesses. Millennials happen to be in an enviable position, as baby boomers will be transferring their wealth to Generation X and millennials in the coming years. Millennials also have other financing options, beyond the more traditional sources of funding, that were not available to previous generations of aspiring business owners. One such financing option is crowdfunding, which became a major option only about a decade ago and is a funding tactic familiar to many younger people. Angel investors are another option. According to the University of New Hampshire’s Center for Venture Research, last year saw an increase in angel investments, which is good news for fledgling business owners.
In terms of executing the deal, one method for navigating the complexities of buying a business is to enlist the services of a business broker or advisor. These professionals can map out a strategy and structure the purchase of a business. This addresses the issue of know-how, at least for the beginning of business ownership.
Here are just a couple of aspects that a broker or advisor can help negotiate:
• Involvement of the seller: Many business relationships are personal and dependent on the business owner. A purchase agreement can include a clause about the seller remaining involved for a set amount of time to introduce the buyer to key customers and to ensure a smooth transition of major relationships.
• Continuation of staff: Employees understand the business’s operations and procedures. A buyer can demand a provision that allows them to walk away from a deal if they don’t believe key staff will remain long enough to transfer their knowledge.
These professionals can also help a buyer avoid pitfalls, including:
• Assuming financial liabilities: The business purchase transaction should be conducted in a way that allows the buyer to avoid assuming debts, sales tax liabilities or payroll tax liabilities.
• Being sued for the seller’s actions:The buyer can demand indemnity to ensure the seller will defend any lawsuits and pay any fees and judgments arising from the seller’s actions.
They also can help a prospective buyer by prescreening businesses for sale and negotiating terms.
There are several ways prospective business owners can find a broker or advisor to work with. Consider asking for local referrals from other people who have purchased similar businesses or asking your local chamber of commerce or economic development office for a referral. Look for online directories and reviews to research and identify professionals in your area.
When vetting a potential broker or advisor, there are also some considerations to keep in mind. Before meeting with one, buyers should be prepared to answer a few questions, such as “What kind of business would be desirable — industry, location, size and so on?” “What financing will be available for a potential purchase?” and “What is the preferred timeline for purchase?”
Look for a broker or advisor who is experienced in buying and selling the kind of business you want to buy and in selling the size and value range of business you seek to buy. To find an experienced professional, look for International Business Brokers Association (IBBA) certification. It’s also key to make sure the broker or advisor has long-standing relationships with attorneys and accountants to help you in the process.
Finally, and related to that last point, a young prospective business owner should have a “due diligence team” that includes an attorney, an accountant and a banker, in addition to the business broker or advisor. These team members can provide a millennial entrepreneur with experience that comes only with time and specialization. They can help assess the benefits, liabilities, risks and opportunities that come with a business — in short, they can help ensure that the price of a business is justified. Together with the right team, millennial entrepreneurs can gain the expertise and the means necessary to become successful business owners.
Read More: Forbes