Over the next decade, the United States is expected to experience one of the largest generational ownership transitions in business history. As millions of baby-boomer entrepreneurs approach retirement, a substantial number of privately held companies will need to change hands.
While much attention has focused on the demographic forces behind this shift, an equally important question remains: how will these acquisitions be financed?
For many lower middle-market transactions, traditional sources of acquisition capital such as senior debt, mezzanine financing, or equity can be limited or costly. As a result, sale leasebacks are increasingly emerging as an important financing tool capable of helping facilitate this historic transition in business ownership. By monetizing real estate owned by operating businesses, sale leasebacks can unlock capital that supports acquisitions, enhances returns for buyers, and allows retiring owners to realize the value embedded in their companies.
A Historic Ownership Transition
According to research from McKinsey & Company, as many as six million small and medium-sized businesses in the United States could face ownership transitions by 2035 as aging owners retire. Of these, more than one million companies may be viable candidates for acquisition, representing as much as $5 trillion in enterprise value (Source: The Great Ownership Transfer: A New Era of Business Stewardship, McKinsey Institute for Economic Mobility).
The scale of this transition is significant because small businesses represent a cornerstone of the American economy. Approximately 99% of U.S. companies are classified as small businesses, collectively employing more than 60 million workers—nearly half of the national workforce—and generating roughly 35% of business revenue.
The ability of these businesses to transition successfully to new ownership will have direct implications for employment, local economic stability, and wealth creation across the country.
However, successful transitions require more than willing buyers and sellers, they require efficient access to capital.
Financing Challenges in the Lower Middle Market
A large portion of the upcoming ownership transition is expected to occur within the lower middle market, generally defined as businesses with enterprise values between approximately $500,000 and $25 million.
Acquiring businesses in this segment often presents unique financing challenges. Buyers frequently encounter:
- Limited availability of traditional acquisition financing
- Fragmented deal sourcing and advisory ecosystems
- Capital structures that rely heavily on seller financing or personal guarantees
These dynamics can slow transaction execution or prevent otherwise viable ownership transfers from occurring.
As the volume of ownership transitions accelerates over the next decade, the market will increasingly require flexible financing solutions capable of bridging these gaps.
Sale Leasebacks as Acquisition Financing
For companies that own the real estate from which they operate, such as manufacturing facilities, distribution centers, or specialized operational properties, a sale leaseback can serve as a powerful source of acquisition capital.
In a typical structure, a real estate investor purchases the property from the company and simultaneously leases it back to the operating business under a long-term net lease. The operating company retains full operational control of the facility, while the transaction converts illiquid real estate equity into immediate capital.
Within an acquisition context, this structure can serve several important financing functions:
- Funding a portion of the purchase price of the operating business
- Reducing the amount of equity required from the buyer
- Enhancing overall transaction returns
- Providing liquidity to sellers while preserving operational continuity
For many buyers, particularly private equity sponsors and independent operators acquiring lower middle-market businesses, sale leasebacks can effectively function as an additional layer of acquisition financing backed by real estate collateral.
Alignment with Real Estate Investors
From the perspective of investors, sale leasebacks represent long-duration credit investments secured by both corporate cash flow and underlying real estate assets.
Sale leaseback investors typically underwrite the same operating fundamentals considered by lenders and equity sponsors, including the durability of the business, its competitive positioning, and its ability to support long-term rent payments.
Leases commonly run 15 to 20 years, providing operating companies with stability while offering investors predictable income streams backed by mission-critical facilities.
This alignment between operating companies, acquisition sponsors, and real estate investors has helped make sale leasebacks an increasingly common component of private equity-backed transactions.
Enabling the Next Generation of Business Ownership
The coming decade will likely see millions of small business owners exit companies they have built over decades. Ensuring these businesses successfully transition to new ownership will require not only buyers and sellers, but also the financing mechanisms necessary to complete transactions at scale.
Sale leasebacks are uniquely positioned to support this process, particularly in cases where businesses own valuable operational real estate that can be monetized as part of an acquisition structure.
As the generational transfer of American small businesses accelerates, sale leasebacks will increasingly serve as a bridge between retiring owners and the next generation of operators, helping unlock capital, facilitate acquisitions, and ensure that viable businesses continue operating in communities across the country.