Turning over the keys to rural businesses
Two of every three businesses in the U.S. are owned by a baby boomer looking to turn over the keys to the next generation in the coming years.1 That means change is inevitable in the landscape of Minnesota’s Main Streets and business communities.
Bruce Schwartau, who leads Extension’s Community Economics program and analyzes Greater Minnesota’s retail trade sector, has been watching the change. “The challenge of this demographic shift is that efforts will be needed to attract buyers,” he says. “These shifts will also mean a transfer of community leadership when current business owners step back. But, done well, business transfer can push a ‘reset’ button that spills over to community life in positive ways. Either way, there’s a lot at stake for communities.”
Because each business is critical to rural economies, Extension educators have heard concerns about business succession in rural communities. Those concerns spurred Extension community economics educator Liz Templin to lead a team to examine business succession. “We wanted to hear from business owners that recently purchased businesses in small towns. From them, we can learn about the struggles and the opportunities of business succession. Most important, we wanted to learn what communities could do to help."
Asking businesses and communities
To examine rural business succession, Extension identified 690 Greater Minnesota cities with populations under 7,500 residents, and ultimately identified 358 businesses that had transitioned to new owners between 2008 and 2012.2&3 This timeline was selected to ensure that businesses were stable for at least three years after business purchase. A total of 176 businesses responded, for a 49% response rate.
The team also interviewed the leaders of rural business succession initiatives in four rural Minnesota communities and two North Dakota communities. The goal was to compile lessons they learned, and to hear what they recommend to other communities.
More than just “dodging a bullet”
First, some good news. Most of the new business owners surveyed said that they’d brought new customers and increased sales to the businesses they purchased. In fact, 69% had increased the sales volume of their business; 68% had increased the customer base; and 41% had increased the number of employees. Moreover, 87% had either maintained or increased the number of employees.
Michael Darger, Extension Business Retention and Expansion Specialist, calls this an “aha!” finding. “When communities support the successful sale of a business they’re not just 'dodging a bullet'. Business succession can grow the local economy. For rural businesses, in particular, this is critical. If you don’t retain that business, another community will capture the economic activity.”
Who will buy rural businesses?
Study results indicate that a variety of entrepreneurs are choosing to run a business in rural communities. The study found that:
- 45% had lived in town their entire life;
- 12% returned to their hometown to take over the business;
- 33% were new to town. Of these, 19% picked the location and then found a business to buy; 14% picked the business to buy and then moved to town.
Ben Winchester, Extension Research Fellow who identifies rural trends, is excited to see new owners invest in small towns and change the landscape of rural economies. He isn’t surprised that a strong portion of buyers are returning to rural areas or moving to small towns for the first time. “People aged 30 – 49 are attracted to rural communities for the quality of life they can have there.These people bring businesses with them or purchase existing ones. Where would our communities be without them?”
Supporting new business owners
Buying a rural business is a challenge and, not surprisingly, financial challenges are at the top of the list. Roughly 30% of those surveyed said it was difficult to finance the purchase of the business and 25% said it was tough to get accurate sales and profitability records from the previous owners.
That’s where the community of Barnesville, MN (population 2,563) thought they could help. The city of Barnesville, through its Economic Development Authority, provided succession planning workshops in 2014 for retiring owners. Presenters covered financing the ownership transition, creating a succession plan, business valuation and other key topics. These workshops, supplemented with one-on-one conversations with retiring owners and their employees, encouraged succession planning. “Our recent Business Retention and Expansion study found that 46% of local businesses surveyed had no succession plan in place. That’s a concern,” says EDA Director Karen Lauer. “One of our important local businesses even said their plan was to ‘just shut the door.’ That was a red flag. We knew we needed to step in.”
What can communities do?
“The importance of business succession planning can’t be understated,” says Templin. “Solid planning assures that finances are in order, infrastructure is in place, and employees are ready for the change.”
But there are some critical barriers between owners and succession planning. Business consultation, as well as the recommended business updates (like remodeling a building), can be expensive. Planning takes time that small business owners don’t have. And business owners worry, too, about whether the process will result in others hearing about matters they want kept confidential. To overcome these barriers, owners need to understand the benefits of succession planning.
"Community leaders can start a conversation with local owners to help them invest in succession planning,” says Templin. Karen Lauer notes that these conversations have been quite productive in Barnesville. “Our businesses were grateful to hear a variety of perspectives to help them start thinking about these topics,” she said. “Many business owners had been thinking about business succession but had no clue where to start.”
The study pointed to a number of opportunities for communities to support business succession:
- Offer low- or no-cost professional valuation of local businesses. Valuations can level the retiring owners’ expectations with market realities and help owners make a practical list of things to do to increase the value of their business.
- Bring local bankers and accountants to the table. New owners named bankers and accountants as the most critical conduits for their success. “These players may not know how important they are to their community’s future,” says Templin. “Community leaders can bring them to the table, make connections to potential buyers and urge creativity when it comes to providing credit to buyers.”
- Offer mentors. Businesses strongly indicated that help from experienced business people helped them succeed. This is a great role for retired business owners.
- Find micro-lending funds. A little financial support might make a big difference to new buyers. And the vote of confidence it gives from the community also makes a difference.
- Consider the workforce. Potential buyers are deterred if they don’t know whether they can find good local employees. To address workforce development communities can, for example, connect businesses to workforce training programs and invest in quality of life improvements that help businesses attract employees.
- Find intermediaries to broker business sales. Business brokers often do not serve rural Minnesota, but one community initiative sought out brokers of all kinds and noted that trade associations can share information and connections that can facilitate a sale.
- Be realistic about business viability. Though communities may have heartfelt nostalgia for all local businesses, some may not have kept up with global trends or current technology. In these cases, hanging on may deplete public resources — not to mention community morale.
"Above all," says Templin, "don't be apathetic. Ask what retiring owners need and find resources for new owners. Most importantly, welcome new business owners to town. They are the future."
Read more study findings (268 K PDF).
1The U.S. Census Bureau estimated in 2012 that approximately 67% of small business owners were born before 1967.
2The study excluded farms, as well as medical providers and grocery stores. Extension already has comprehensive programming in place to support farm transition. Medical providers are often owned by non-local entities. And grocery stores were the subject of a recent Regional Sustainable Development study that Extension did not wish to duplicate.
3Data was obtained through a contract with Infogroup, a provider of business data.
- The U.S. Small Business Association offers this overview of business succession planning for owners.
- A host of educational materials and referral resources for rural grocery stores are available on RSDP's Rural Grocery Stores web site.
- Extension educators can help communities examine their retail economy.
- The Business Retention & Expansion program helps communities hear the needs of their local business community.
- Small town business buyers and sellers face hurdles in transition and local support can help new business owners succeed(Mankato Free Press).
- Findings from an Extension study show that rural communities can foster transition to new business ownership (University of Minnesota).
Reviewed in 2016