By JAMAR COBB-DENNARD
Communities struggle when jobs and wealth leave the neighborhood. When the big employer leaves, joblessness, drug use, poor housing stock, food scarcity, and infrastructure woes begin to plague once successful areas of the city.
There is a way up through business ownership and succession.
Many communities are already taking advantage of small business growth as an essential economic development tool. Social programs, grocery stores, and crime prevention are all necessary tools of neighborhood revitalization. However, communities need sustainable long-term fixes that create cash for generations. Even though a large corporation could come (back) to the neighborhood, we cannot count on it. Small business training, ownership, and succession are the fix.
There are challenges associated with using small business development as an economic development tool. Education, access to capital, funding, and more create roadblocks that can be overcome with strategic planning and execution.
Education: We Need More Incubators
Business incubators are starting to show up in economically challenged communities. We need more of them and we need professionals to donate their time and educate new business owners on the tools of success. CPAs need to show up to teach tax mitigation and payment strategies. Attorneys need to be on-hand to discuss business formation, risk management, and contracting. We need wealth managers on deck to teach entrepreneurs how to save, invest, and leverage their business as a wealth creation tool.
Be a Buyer, Not a Founder
Many see the only path to entrepreneurship in starting a business. Starting a business is expensive, time consuming, resource demanding, and has a high rate of failure. Purchasing a business is the best path to ownership. Cash flow/profit is already baked into the deal. Employees, clients, systems, vendors, and suppliers come with the company. Acquiring a company gives entrepreneurs a running start.
Gain Access to Capital
Getting money to start or buy a business, when you have few assets to lend against, can be challenging. Entrepreneurs want to start a business to produce cash and build assets, however it is tough to get a loan without cash flow or assets. Savings, investment partners, grants, and special bank loans can be the answer. Some financial institutions have 0% and 5% down payment loans available for acquisitions by minorities. Consider buying your employer’s company. This can be done slowly through payroll deducted equity contributions, or all at once with a bank loan specifically suited for acquisitions by employees. It would also behoove communities to pool financial resources together, start an investment fund, and pour money into acquisitions in specific neighborhoods.
Select Profitable Industries
Cupcakes and ribs are delicious, but food or retail as the foundation of a business are an unlikely source of long-term wealth for a community. The best companies to start or acquire produce 10-30% annual profit, are able to run without the owner, have a service or product that produces automatic recurring revenue, and are not dependent on a handful of clients. Manufacturing, software, business services, and building trades are excellent industries to do business in.
Know the Business’ Financials
Gross sales are simple to calculate. However, the numbers that make the biggest impact on wealth creation are costs of goods sold (COGS), operating expenses, earnings before interest, taxes, depreciation, and amortization (EBITDA), and net income. Get a FreshBooks or QuickBooks account, connect it to your bank account, and begin tracking income and expenses. This practice will help with business management, future valuation and sale, and having the right documentation to get a bank loan.
Hire Within the Community
Now that we have a well-funded business run by an educated owner, the owner should place a priority on hiring within the community. Some residents may need to skill-up. This is where the community college, trade schools, and community development centers come in. Business owners should also financially invest in skills training, language instruction for non-English speakers, family support services for their employees as employment benefits. Then, teach the best employees how to run the business, and allow those employees to run, and have equity in, your next acquisition. As entrepreneurs hire more and more of the neighborhood, the tide of success will raise all boats.
Leverage the Benefits of Business Ownership
Business ownership comes with benefits. Entrepreneurs can reduce their tax burden through write-offs. The business owner can deduct charitable contributions to neighborhood organizations. Investors can put their money into tax-credit subsidized real estate developments within their community to shelter profits from capital gains taxes. Owners need to be trained by professional advisors on how to take advantage of tools the wealthy use to maintain and grow their assets.
Create Generational Wealth
Finally, business ownership over job creation creates generational wealth. If someone has a job, once they retire, the money stops. Hopefully, that individual saved and invested well so their retirement is fully funded and they have assets to pass to the next generation upon death. Unfortunately, many are not in the position to fully retire, and even fewer are financially able to provide generations with perpetual wealth.
On the other hand, business ownership can provide generations with jobs and wealth that does not end. Owners can keep jobs in the neighborhood by gifting or selling their business to family or community members. Entrepreneurs can also sell their business, invest the sale proceeds, and have hundreds of thousands to millions of dollars that produce dividends forever.
Good jobs are a path to the middle class. Well-run businesses are the path to individual wealth, generational wealth, and neighborhood transformation.
Jamar Cobb-Dennard is a M&A attorney and business broker. To learn more about how to buy or sell a business, email Jamar at jamar@jamarcobbdennard.com.
