A Business Can Have Real Value and Still Not Be Ready to Transfer

Six million small businesses will change hands by 2035 as their owners retire, according to new McKinsey research on what it calls the Great Ownership Transfer. Roughly one million of those are considered viable transfer candidates, together holding as much as $5 trillion in enterprise value.

What actually stopped me was the closure rate: 92 percent of eligible small business exits end in closure instead of transfer.

McKinsey traces most of that to market infrastructure: the systems for transferring ownership in the U.S. are fragmented, particularly for businesses in the middle of the market.

At the transaction level, there's a narrower version of the same problem: value and transferability aren't the same. Unfortunately, many sellers learn that for the first time during diligence.

What Transferable Value Actually Means

Most conversations about business value start with the financials: what the business earns, how consistently, and what multiple that record supports. A business can post strong revenue, carry real margin, and support a credible valuation. It can still be built around one person instead of the business itself. When that person leaves, the relationships, the judgment calls, and the decisions that were never written down leave too. What looks like enterprise value in the seller's financials is sometimes just owner value.

Buyers test for this directly. Do the customer relationships belong to the business, or to the person who built them? Is the operating judgment written down anywhere, or does it live in one person's head? Is the financial reporting organized around how the business actually operates, or just around what the accountant needs at year-end? Most sellers have never asked themselves these questions, because nothing in day-to-day business operations forces them to.

I've spent three decades on the deal side watching this play out. More often than not, the business really is worth what the seller thinks. The open question is whether that value survives the handoff.

Where Concentration Risk Lives

What I've seen on the sell side follows a pattern. Owners underestimate how long preparation takes. Many don't know their exit options exist. Emotional attachment slows the decision, and in smaller or rural markets, the legal and accounting advisers on hand often haven't handled a complex transfer before.

Most owners haven't made their business legible to anyone but themselves.

Ask where the owner still sits at the center of the business, and it shows up in the same four places. The customer relationships are held personally and don't transfer at close. The institutional knowledge sits with employees whose loyalty was built around one person, not a system. The supplier terms depend on personal rapport instead of contract. The approval authority sits with whoever's been running the place, instead of being spread across a team.

Channel relationships fail this test in a specific way. A distribution network can look completely stable on paper, right up until a buyer asks who actually owns those relationships: the business, or the person who built them twenty years ago. That answer decides whether the revenue in the base case is real or borrowed.

What Buyers Are Actually Assessing

Buyers have their own version of this problem, and McKinsey names it plainly: even when a buyer wants the deal, and the business has real value, the transaction can stall because financing is hard to arrange, information is incomplete, or diligence costs more than the deal size can absorb.

At the transaction level, diligence is really one question asked in different ways: what carries forward after close?

Do the key customer relationships belong to the business, or to the person who built them? Is there a second layer of leadership that can run the business without the owner in the room? Do the numbers show where the business actually makes its money, or just what an auditor needs to see? Do the distribution relationships survive a change in ownership, or unwind once the person who built them is gone?

Get a bad read on any of these late in the process, and the buyer is left with three options: renegotiate price, restructure the deal around retention terms, or walk. Each option costs something that earlier diligence would have avoided.

The Missing Middle Explains the Closure Rate

McKinsey refers to businesses valued between roughly $500,000 and $25 million as the missing middle. These businesses are too large for an informal handoff and too small to interest institutional capital or professional intermediaries, even though they have real operating histories, real earnings, and fewer advisors, buyers, and financing options than any other segment.

The diligence infrastructure on both sides is thin. Most of these sellers have no professional representation, and their books are built for tax compliance, not for showing a buyer how the business performs. Buyers face limited visibility into deal flow, diligence costs that eat disproportionately into small deals, and financing tools that were never built with this segment in mind.

These businesses have value, but the market that would connect them to a ready buyer was never built. McKinsey puts a number on how much of that gap was avoidable: 6 to 13 percent of closures in this segment didn't have to end that way.

The businesses that avoid becoming part of that statistic all did the same thing. They started preparing before the business went on the market.

What Preparation Looks Like Before a Process Starts

On the sell side, preparation means making the business legible to someone who isn't the owner. The financial reporting is restructured by product, customer segment, and geography, not just built to satisfy compliance. The customer and channel contracts belong to the business, not the person who signed them. A second layer of leadership can actually operate without the owner in the building. A Day 1 plan, built jointly with the eventual buyer late in the process, spells out who owns which relationship the day after close.

This is the kind of work that gets skipped before a business goes to market, so it shows up as a surprise in diligence instead of a strength in the pitch.

On the buy side, diligence shouldn't stop at confirming the business earns what it claims. It has to answer why the business works, which of those reasons survive a change in ownership, and what the new owner will actually be left managing once the current one is gone.

McKinsey is right that the infrastructure for transferring small businesses is underbuilt. But the market won't prepare a business for the buyer sitting across the table. That work happens at the transaction level, and it falls to the people actually in the room: sellers making the business legible before anyone asks them to, and buyers testing for concentration risk before signing.

The businesses that clear the missing middle are the ones where the value doesn't leave when the owner does.