The Greatest Transfer of Businesses in American History

For twenty years I was a portfolio manager at some of the world's largest and most competitive hedge funds, analyzing what businesses actually earn and what they are worth, and putting capital behind the answer with my own record on the line. I now do that work for the people buying small businesses. This letter is that discipline, applied to their side of the table.

Somewhere in America today, the owner of a thirty-four-year-old HVAC company is sitting at his kitchen table, deciding to sell. He is sixty-eight. His kids went into other lines of work. The business throws off $1.8 million a year, employs fourteen people, and holds service contracts with half the commercial buildings in his county. He built it one truck at a time, and there is no one in the family to take it.

He is not unusual. He is the single most common story in American business right now. Swap the trucks for an electrical contractor, a roofing company, a plumbing outfit, a welding shop, a parts distributor, and the same story is repeating across every trade that keeps the physical economy running.

I want to be precise here, because the numbers usually quoted for this wave are either vague or inflated, and precision is the point of this letter. There are about 2.9 million employer businesses in the United States owned by people fifty-five and older. Not sole proprietorships, not side hustles: companies with payroll. Together they employ 32 million people and generate roughly $6.5 trillion in revenue. That is the population at the kitchen table.

Somewhere between 60 and 80 percent of those owners, depending on which survey you trust, have no written succession plan. McKinsey's estimate is that six million businesses will change hands by 2035, carrying something like $5 trillion of enterprise value. The oldest boomers are now eighty. The youngest are past sixty. The math on this is not a forecast; it is actuarial.

Here is the number that should stop you. According to the Exit Planning Institute, roughly 70 percent of the businesses that go to market never sell, and about half of all owner exits are involuntary: death, disability, divorce, distress. Most of these companies will not be sold well. A large share will not be sold at all. They will close, and the jobs and the local capacity will go with them. That is the tragedy hiding inside the largest wealth transfer in American history. Whether it plays out that way depends, deal by deal, on buyers who can tell a good business from a good story. Helping them do that is why this letter exists.

Across from the owner sits a new kind of buyer. Some are searchers, individuals, often with investor backing, hunting for one good company to buy and run. Some are independent sponsors assembling deals one at a time. Some are operators leaving corporate careers with their savings and an SBA loan. What they share is this: they are buying businesses that are small by Wall Street standards and enormous by personal ones, and many are choosing these businesses deliberately, because the work is physical, local, and licensed, the kind of enterprise that AI is far more likely to strengthen than to replace. A $3 million acquisition will not make the news. It will, however, consume most of the buyer's net worth, a personal guarantee, and the next decade of their life.

The financing system tells you how big this has become. Last year the SBA's 7(a) program alone backed 7,533 change-of-ownership loans totaling $8.8 billion, up from $5.5 billion two years earlier: 22 percent a year, in a category almost nobody outside the industry tracks. The largest online marketplace reported 9,586 closed sales at a median price of $350,000. And in a special issue a few days from now, I will take apart the new SBA rule that changes that financing system on October 1, in ways that make everything I am about to say more urgent.

Which brings me to the problem I intend to write about in this letter, issue after issue, because I believe it is the most underappreciated problem in this entire market: most of these buyers cannot actually verify what they are buying.

Consider what the buyer of that HVAC company is working with. A tax return that may or may not reconcile to the P&L. A QuickBooks file maintained by the owner's spouse. An "adjusted EBITDA" figure with eleven add-backs, several of them creative. Customer records that live partly in software and partly in the owner's head. The seller is not necessarily dishonest; most are not. But every seller is telling a story, and the numbers have been dressed for the occasion.

Now notice something about prices. A private equity firm will pay a full institutional multiple for a company in one of these trades once it is big enough to diligence properly. The owner at the kitchen table, selling the same kind of business at one-tenth the size, will get a fraction of that multiple. Some of that gap is scale and some is liquidity. But a large part of it, larger than most people in this market admit, is the verification discount: buyers pay less because they cannot be sure what they are buying, and they cannot be sure because the machinery of certainty was built for deals ten times larger. The roll-up industry has made a fortune on exactly this arbitrage, buying at the kitchen-table multiple and selling at the institutional one, with diligence as the bridge. The discount is not a law of nature. It is the price of not knowing.

Institutional buyers solve this problem with money. When a private equity firm buys a company or a Wall Street bank advises a client, it deploys a quality-of-earnings team, industry consultants, legal counsel, and weeks of analysis, at a cost that routinely exceeds a hundred thousand dollars. That machinery exists because sophisticated investors learned, expensively and repeatedly, that the difference between what a business appears to be, and what it actually is, can be the whole ballgame.

Main Street buyers get none of this. Traditional diligence is priced for deals ten times their size. A $50,000 quality-of-earnings report on a $2 million acquisition is not rigor; it is a rounding error that eats the working capital. So buyers compromise. They hire an accountant for a light review, or they lean on the broker's package, or, more often than anyone admits, they trust their gut and the seller's handshake. Sometimes that works. When it does not, it does not fail small. It fails with a personal guarantee attached.

I spent those years on the institutional side of this divide. As a portfolio manager at several of the world's most demanding hedge funds, my job, stripped of the vocabulary, was to look at businesses under time pressure, figure out what was real, and commit capital to the answer with my own track record on the line. The firms I worked for spent extraordinary sums building the machinery of verification, because they understood something that every first-time buyer learns eventually: conviction without verification is just hope with leverage.

What I learned is that the machinery is expensive, but the method is not. The method is a way of thinking: a discipline of asking where a number comes from, what would have to be true for it to hold, and where the incentives point. That discipline can be taught. Increasingly, with modern tools, much of its legwork can be automated. What cannot be automated is judgment, and judgment is precisely what twenty years of institutional scar tissue produces.

Three habits from that world translate directly to the kitchen table, and they are a good place to start. First, deposits are the truth; a profit-and-loss statement can say anything, but a bank statement cannot. Second, every add-back is a claim, and a claim has to be tested against the documents, not the seller's explanation. Third, the question is never whether the business is good; it is what would have to be true for the price to make sense, and whether you can check it.

Every two weeks, the analyst's read on this market. Some issues will teach the method on a real deal, anonymized and taken apart: add-backs, customer concentration, working capital, owner dependence, the places sellers hide problems in a P&L, what actually moves a multiple. Some will take on the market itself: the rules, the rates, the multiples, the wave, and what they do to a deal. And some will translate what I learned in twenty years of institutional investing into terms that matter at the kitchen table. No selling, no filler, no recycled listicles. Written for the buyer, and, increasingly, for the lender and the broker sitting beside them.

The wave of transitions coming is a genuinely good thing for this country if it goes well: if durable local businesses land in the hands of capable new owners instead of dying with their founders. Whether it goes well depends, deal by deal, on buyers knowing what they are buying. The wealth at stake in this transfer, wealth that will be maintained, grown, or quietly destroyed, gets decided at kitchen tables like that one, deal by deal, by the quality of what buyers know. My aim is to move that needle, two weeks at a time.

A request, before I sign off, because this letter is meant to be a conversation: if you have lived through a deal where the numbers and the reality parted ways, as a buyer, a lender, a broker, or the person doing the diligence, hit reply and tell me about it. The best of these stories, anonymized and dissected, will become future issues.

The owner at the kitchen table has made his decision. The question that matters now belongs to the person across from him: is this business actually what the seller says it is?

Let's learn how to answer it.

G.F.S.

Gray F. Smith spent twenty years as a senior portfolio manager at some of the largest global hedge funds, including Millennium, Caxton, and J. Goldman, before founding his own fund, Franklin Street Capital Partners. A Harvard economics graduate and Institutional Investor Hedge Fund Rising Star, he is the founder of Workup, bringing institutional-grade diligence to small business acquisition. Learn more at getworkup.ai.