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The Importance of Business Succession for Rural Communities
USAgNet - 07/24/2017

It happens in small towns across the country. A long-time business must close its doors because it has no successor, leaving a community with the empty storefront of a shop that once offered a product or service, jobs and philanthropic support.

The vitality of rural economies depends as much on maintaining these existing businesses as attracting new ones, said Iowa State University economic and small business experts. Even though resources are available to assist with business succession, several factors can complicate plans to sell or pass on the business to an heir. In rural communities, location and declining population are obstacles.

"Succession can be challenging even when an owner has an heir in mind to take over the business. Sons or daughters go off to college and are not always interested in going back to small town Iowa to run the family hardware store," said Georgeanne Artz, an assistant professor of economics.

Artz has studied differences between rural and urban entrepreneurs to understand how location affects business creation, succession and income. There is a perception that urban areas are better for business, but Artz's research shows that is not always the case. After controlling for factors such as education and cost of living, she found relatively little difference in pay and an advantage for rural entrepreneurs who have location-specific capital.

"Rural entrepreneurs who go home to start a business have location-specific capital. It is a knowledge or skill set they acquire by growing up in the area," Artz said. "That knowledge is more than just preference for the rural setting. It's productive and makes it easier for them to start business than someone who didn't grow up there."

Using this research, state and local governments could develop effective recruitment strategies to target entrepreneurs more inclined to be successful in rural areas, Artz said. As an example, Artz says high schools could offer entrepreneurship programs that encourage students to come back after college and start or take over an existing business.

According to a 2017 America's Small Business Development Center study, 59 percent of Millennials said with the right idea and resources they would start a business. While many entrepreneurs gravitate to urban areas, there is tremendous opportunity in Iowa to start a business or purchase an existing one, said Lisa Shimkat, state director for Iowa SBDC, which is part of ISU's College of Business.

"We encourage a lot of young entrepreneurs to approach existing business owners to see if they would be interested in selling," Shimkat said. "We've had several cases in which the business owner was on board. It just took someone to approach them with the idea."

For business owners without a successor in mind, it is a welcome opportunity. Shimkat says owners are often willing to train their successor and negotiate a fair price to make sure the business continues to thrive. SBDC can help both young entrepreneurs and existing business owners navigate the process -- assessing business value, identifying funding, creating an exit strategy -- to guarantee a successful transition.

Nearly 70 percent of family businesses do not have a succession plan, according to Iowa SBDC's 2017 State of Small Business and Entrepreneurship. The average business owner in Iowa is 50 years old and more than 14,000 business owners are 70 or older. Shimkat says these numbers not only highlight the opportunity for young entrepreneurs, but the potential impact if a majority of these small businesses would close.

Succession is not only a concern for small business. Peter Orazem, University Professor of economics, says many communities are facing a transition in leadership as more baby boomers retire.


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