Entrepreneurial Business Formation over Time

Entrepreneurs come to own their businesses in a variety of ways. Most small businesses are startups, in which the entrepreneur starts the business from scratch. Other businesses are bought. Some are inherited or received as gifts.

How to entrepreneurs come to own their businesses? The figure below, which is built from Survey of Consumer Finances data, summarizes how business owners report having come to own their enterprise:

entrepreneur-acquisition

Over time, the proportion of businesses that were acquired through purchase or gifts has declined as an overall proportion of businesses. In 1989, about 25% of enterpreneurial enterprises were acquired through purchase, and another 9% or so were received as gifts or inheritances. About 64% had been started by the entrepreneur operating the business.

The proportions appear to have been changing slowly but steadily over the past several years. By 2013, the proportion of bought businesses fell by half to about 13%. Given businesses stood at about 5%, roughly the range in which they stood since the early 1990s. In contrast, over three-quarters (76%) of enterpreneurial enterprises were started by their owners.

The striking decline in purchased businesses suggests that the secondary market for owned businesses is shrinking. Perhaps today’s small businesses are much more likely to close up shop than be sold off. The marketplace may be more competitive, and businesses might not be as profitable and thus valuable on secondary markets, so more entrepreneurs may simply opt to close up rather than sell their businesses to someone else.

The small proportion of businesses that have been acquired as gifts, including inheritances is striking. Small enterprise are rarely a vehicle for maintaining familial economic dynasties – most businesses live and die by the entrepreneur that started them. Of course, a successful small business may put an entrepreneur in a position to set up future generations, but these seem to be more the exception than the rule. About 5% of all entrepreneurial enterprises – less than 1% of society – operates a business that they did not build or buy.

These figures suggest that most business people live off of enterprises that they created and nurtured. Inherited businesses are not very commonplace, and the secondary market for businesses seems to be drying up over the long-term.

 


Also published on Medium.

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