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A new report from the McKinsey Institute for Economic Mobility focuses on an unprecedented wave of small-business ownership transitions. By 2035, about 6 million small and medium size businesses (SMBs) will face ownership transitions as owners retire. Small businesses are bedrock of the United States economy as 99% of all companies fall under the SMB category. This transition is significant for the future of the economy.

Further, the report provides further evidence that indexing capital gains for inflation would be a major boon to the U.S. economy.

As the country approaches a historic wave of small business ownership transitions, trillions of dollars in business value will change hands over the next decade. Failure to account for inflation in the tax code will discourage transactions and lead to unnecessary business closures rather than productive transfers.

Key excerpts from the report:

  • “More than one million firms are viable candidates for sale, representing up to $5 trillion in enterprise value that could remain productive if ownership transfer becomes routine rather than exceptional.”
  • “Despite the economic value embedded in many small businesses, closure—not continuity—is the dominant exit path today… Ninety-two percent of [business] exits occurred through closure, 5 percent were completed as sales, and 3 percent transferred to new owners. This pattern suggests a structural weakness rather than widespread business failure. Since 2010, 7 to 8 percent of all firms have closed each year. Our analysis suggests that 6 to 13 percent of these closures could have been avoided.“
  • The scale of small business is often overlooked, but in reality “roughly 6.4 million employer firms together employ 62 million workers, accounting for nearly half of the US workforce. Collectively, they generate about $17.8 trillion in annual revenue, representing approximately 35 percent of all business receipts nationwide. They are embedded across supply chains, export markets, and local tax bases, influencing the stability and competitiveness of nearly every sector.“
  • The report maintains that “effective transitions could keep up to 12 million jobs in place and protect about $250 billion in annual local spending power.“
  • The importance can not be overstated: “The next decade will determine whether the Great Ownership Transfer becomes a $5 trillion opportunity for inclusive growth or instead results in an erosion of the small-business backbone that supports local economies.”

Without capital gains indexing, many of these transactions could be delayed or never occur at all. Owners that face steep inflation-driven taxes could decide to stick with the business longer than economically feasible or rather close their doors instead of sell. When these transitions fail, the consequences extend far beyond the owners. The result is fewer successful transitions, disappearing businesses, and lost jobs in local communities that rely on them.

This is a once in a generation $5 trillion transfer that will determine whether millions of businesses, jobs, and communities survive or disappear.