For most small business people, the ideal life goes pretty much like this: a few years of all-consuming obsession to get set up, followed by a few decades of 12-hour days to build a reputation and client base sufficient to make the business valuable. Then sell out for enough to retire comfortably.

This is easier said than done, of course, since most small businesses fail pretty quickly. But over the past half-century it was common enough to be a realistic goal for generations of American entrepreneurs.

Today, not so much. When the pie is shrinking, as it has been since 2008, small businesses begin to cannibalize each others’ customers and niches, making each business less viable. Entrepreneurs find themselves on a treadmill where ever more work produces ever less reward, and the prospect of selling out for enough to retire recedes ever further into the future. Last Thursday’s Wall Street Journal published two long articles illustrating this process. Here’s an excerpt from one of them:

‘The Economy Stole My Retirement’
Danny Sullivan dreams of gardening and spending time with his grandchildren, but that’s just a fantasy. Retirement is out of his reach, at least for the foreseeable future.

The 62-year-old founder of a small catering company spends his days helping stock bars with beer and ice, wooing potential new clients and juggling the 20 to 30 different events his firm handles daily.

“I am so tired,” he says. “I don’t know that I’ll ever be able to retire.”

The weak economy has been tough for small-business owners across the board, with their total revenue inching up by just 3% since 2007 and declining in fields such as construction (-12%), real-estate services (-3%) and retailing (-2%), according to financial-software maker Intuit Inc. But for entrepreneurs in their 60s and 70s, the consequences have been particularly vexing.

Right Time?
Many of them are stuck in “business purgatory,” unable to retire and forced to hang on for a recovery that economists say could still be a long way off.

Mr. Sullivan has struggled to sell Arguello Catering Inc., the Redwood City, Calif., business he started 21 years ago, at a price anywhere near the $850,000 or so he figures he needs to stop working. He reckons that about 70% of his nest egg is tied up in the 25-employee company.

Its annual revenue has fallen to roughly $2 million from $3 million before the recession, Mr. Sullivan says. He has tried, without success, to boost the business’s value by branching into new markets, expanding hours of operation and adding healthier menu options. He says he got three offers for Arguello this year, but they were far too low.

Nearly half of the 799 small-business owners surveyed in August by The Wall Street Journal and Vistage International, an executive-mentoring organization, expect to retire after age 65, with 38% saying that their planned retirement date is later than they had predicted five years ago. In addition, 56% said most of their retirement nest egg is tied to their business.

Stuck in ‘Business Purgatory’
Baby boomers, in many cases, were blindsided by the recession and its effect on their retirement plans, says George Vozikis, director of the Institute for Family Business at California State University in Fresno.

“Boomer entrepreneurs grew up believing in the American dream that you could start a business and eventually sell it for a good return or pass it onto your kids,” adds Aaron Chatterji, associate professor at Duke University’s Fuqua School of Business in Durham, N.C. “Because of the financial crisis and subsequent recession, that is more difficult today.”

Judy Lawton, 69, says she would like to sell the small staffing company she started 27 years ago. She figures she needs to sell it for close to $2 million to live comfortably. But her company was hit hard by the job-market slump, and its revenue is down by about 60% from before the recession.

Ms. Lawton says she continues to work 12-hour days, meeting with prospective clients sometimes until late at night. She says she can’t afford to expand her business, which is down to 13 employees from 35 a few years ago. She recently sold her office building for $3.1 million to help pay off a $900,000 Small Business Administration-backed loan that she secured to survive the recession.

Ms. Lawton listed her business for sale last year through a broker, but all of the offers she received were “insulting,” she says: as little as $250,000, plus installments that would vary depending on performance. So far, she has turned them down.

“You don’t work for almost 28 years at [building] a company and give it away,” says Ms. Lawton, adding she won’t settle for what she considers a low offer, given the strong reputation and client base she has cultivated.

She hasn’t taken a vacation in years because she can’t afford to travel. “The economy has stolen my retirement,” she says.

Some thoughts
Of all the stories in the “Welcome to the Third World” series, this might be the most disturbing for a couple of reasons. First, entrepreneurs drive a modern economy. They come up with the ideas that change the world for the better, while creating millions of good jobs – and while working harder than just about anybody else, both for the love of what they do and in the expectation of a big pay-off down the road. Take that pay-off away and the rational choice for a lot of these people is to play it safe, put in fewer hours on less risky projects, spend more time with family and less at work. That’s great for the families but, in the aggregate, will make the US economy more like Europe, where jobs are scarce, innovation is slow, and most people depend on government jobs or handouts.

More immediately, entrepreneurs who can’t sell out don’t generate big capital gains, which means lower tax revenue for governments at every level. This creates a feedback loop in which bigger deficits lead to cutbacks in services and/or higher taxes, which make the business environment even tougher and business valuations even lower, and so on. Given the number of cities and states that are already functionally bankrupt, this might be the last straw for a lot of municipal credit ratings. So it’s only going to get worse for entrepreneurs.

And this is all happening with interest rates at almost surreal lows (today’s prime rate, on which many business loans are based, is 3.25%), which means that a solvent small business — or a would-be buyer thereof — has access to the cheapest money they’ve ever seen. And they still can’t seem to put it to productive use. What good is a bank loan if your customer base is shrinking?

The Fed is obviously aware of all this and understands that just cutting interest rates by another quarter-point or adding a bit more reserves to money center banks won’t energize small businesses. So look for something different when the next QE is announced.

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