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Closing the Wealth Gap via Entrepreneurship through Acquisition

The BIPOC wealth gap in the United States is growing, sustained by systemic inequities that have limited access to the cornerstones of wealth creation: real estate and entrepreneurship. While much has been done through CDFIs to improve access to real estate capital for under- served communities, the opportunity for small business ownership has greater access barriers, since BIPOC and women ownership rates are low to begin with. In the US 84% of businesses are white-owned and 62% are men-owned.

Starting a business

The path that has been most promoted for business ownership has been that of traditional entrepreneurship of starting a business. Starting a business from scratch is no easy task and comes with its own set of hurdles and risks, especially when trying to create a high-growth venture. While there is more money flowing through to venture capital funds focused on under- represented entrepreneurs or money flowing to venture funds managed by under-represented GPs, this is just making a small dent in business ownership. Venture-backed startups are risky, with a much higher failure rate, in part, because eventually the venture funds are incentivized to feed the winners (aka potential unicorns) and high growth ideas and let the rest wither away and, if successful, lead to wealth accumulation for a few founders. This path of venture-backed entrepreneurship to close the wealth gap is also highly dependent on the concept of meritocracy, which is not relevant to solving the problem of wealth inequality given that historically this has not been a level playing field and continues to be so.

Office with Black Owned Business Sign

Buying a business

Entrepreneurship through Acquisition (ETA), is a much less risky path to ownership and a path that can be adopted by a wider audience, mid-career professionals, trade-skilled workers, etc. ETA involves buying an existing business, ideally from a business owner who is retiring, and, fortunately, there is a silver tsunami of baby boomers retiring after many successful years of running their small businesses. But, for someone who did not grow up in a family business, or get an MBA, purchasing a business seems unachievable. Due diligence, accounting audits, employee and vendor relationships….

This path of venture-backed entrepreneurship to close the wealth gap is also highly dependent on the concept of meritocracy, which is not relevant to solving the problem of wealth inequality.

A new solution

A fund to support BIPOC and women purchasing profitable businesses.

The returns generated by search funds (as studied by Stanford University), a subset of the PE market, which have been leveraging this opportunity are 30%+ in IRRs. While the context for the returns includes Ivy-league MBAs working with growth-driven investors, this asset class represents a very attractive opportunity to create a program to generate non-extractive returns while using the high investment return capacity to de-risk the business and process for both investors and entrepreneurs. The acquisition strategy can be de-risked by only looking for businesses that have a loyal customer base (think landscaping cos., HVAC, small manufacturers etc.) that ideally drives a recurring revenue stream. They need not be high growth. Imagine a business doing $300,000 in net income every year. Owning such a business will easily put a BIPOC or Women new small business owner on a path to wealth creation.

Black woman with open store sign

Clearly, this is easier said than done. The three big barriers that need to be addressed are:

  1. Awareness of this opportunity with Skills Training
  2. Access to capital
  3. Pre-and post-acquisition support

Not big challenges and worthy of solving given the potential scale of impact. Over 10 million small businesses will be changing hands over the next 10-15 years representing trillions of dollars.

A fund to support BIPOC and women purchasing profitable businesses.

Awareness of this opportunity can be solved by creating education programs and exposing entrepreneurs to this flavor of business ownership or Buy then Build. Training can be provided by dedicated “ETA accelerator programs” that can train more BIPOC and Women entrepreneurs on the process to acquire a business, skills training on what it takes to run and grow an acquired business and the general small business management. Pre-and post-acquisition support can be solved by providing dedicated back-office support for the acquisition process, i.e., due diligence, etc. — not every entrepreneur needs to become an expert of M&A. And post-acquisition change management and back office shared services for finance, marketing, IT, and HR.

Two black men working at computer

Currently SBA 7(a) programs are widely used by entrepreneurs “in the know” to acquire these businesses with the program often providing 85-90% of acquisition finance. But that requires the entrepreneur to put down 10-15% equity from their own sources and/or family and friends and they need to take on a personal guarantee for the entire acquisition debt. These are clear barriers which just perpetuates the cycle of you need money to make money. That barrier too can be removed by creating an equity fund to provide that capital and/or impact debt funds that do not require personal guarantees.

Over 10 million small businesses will be changing hands over the next 10-15 years representing trillions of dollars.

We need a fresh perspective to closing the wealth cap by helping more entrepreneurs of color & women get exposed to this idea, need more character-based lending ideas to support entrepreneurs who have the basic skills to run a business, and non-extractive flexible financing vehicles to make this opportunity real. We invite other fellow impact entrepreneurs and investors on this journey to close the wealth gap. Feel free to post/send your comments and feedback on the above.

Havell Rodrigues is the Founding Partner at New Majority Capital, a firm focused on closing the wealth gap. He is a former fintech entrepreneur and hedge fund manager. He has an MBA from Babson College and is a CAIA charterholder and a TiE-Boston Charter Member.
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