Your small business doesn’t need to close: On the ‘charitable exit’

Tivoni Devor’s “Getting Good Done” column focuses on new models of enacting impact.

Sarcone’s Deli, a beloved South Philly hoagie spot, has closed.

After temporarily shutting down last month because of unpaid back taxes, the business’ owner, has decided to end the 20-year tenure one of the top hoagie spots in the city for good, citing health reasons, according to Philly.com.

We don’t know the inside details nor the have we seen Sarcone’s books, but we can plainly see that this small business, and many like it, did not have a viable exit strategy that would ensure its sustainability.

Presumably, Sarcone’s Deli was not able to find a buyer that would allow the owner to cash out, nor a family member to hand it down to that could’ve generated residual income for the owner. (Although, Philly.com reports, the space is staying in the family.)

As great as the deli was, it ended when the owner retired. It didn’t end because no one wanted to buy his hoagies or any other outside forces.

###

BuyBizSell’s Insight Report says its marketplace facilitates about 2,000 business sales per quarter, against 45,000 active listings. This shows there’s a huge glut of small business owners that want out but have no place to go.

Project Equity is calling this a small business crises, as Baby Boomers own half of all privately held businesses with employees in America, and have no strategy in place to keep the business viable after they retire — and Boomers are retiring by the thousands every day.

According to Project Equity, in Pennsylvania alone, there are about 88,650 businesses owned by Boomers employing a million people and generating over $200 billion in sales revenue. Furthermore, Project Equity reports that only 15 percent of all businesses will be passed down to the next generation, and 20 percent of businesses put up for sale will be sold.

Thus, only 35 percent of businesses whose owners are looking for an exit are sold or handed down — meaning in this state, we can expect well over 57,000 Boomer-owned businesses to shut down due to retiring owners who can’t find someone to take on the business they built.

Selling or closing have been basically the only exit options for for-profit businesses. But there is a third way: the charitable exit.

###

There’s no reason that Sarcone’s Deli couldn’t have been donated or cheaply sold to a nonprofit. Nonprofits run all sorts of traditional for-profit businesses, like coffee shops, retail stores and many other services that leverage the benefits of a nonprofit to make small businesses sustainable in the long term.

For example, if you convert from a for-profit to a nonprofit you can avoid business income taxes, and you can more easily apply for grants and program-related investments from foundations to access capital that you may not get from banks. Local CDCs and nonprofits that focus on workforce development and commercial corridors would be the perfect types of organizations to accept these types of exits.

There are also benefits to the business owner who opts for this type of conversion. Depending on how the business is incorporated, the value of the business will be tax-deductible, or a long-term payment arrangement could be made to the owner, giving them a type of pension.

I’ve written about exit strategies before, but many small businesses that serve their neighborhoods hire locally and barely break even are already basically operating like any nonprofit. Formally converting to a nonprofit could give these owners a long-term legacy as the business they built will keep doing good in the neighborhood.

P.S. As always, consult your lawyers and accountants to get this right.