Increasing Equity in a Post-Pandemic Economy: One transformative strategy for saving small businesses that no one is talking about.
Of the almost 6 million businesses in the United States, firms with fewer than 500 employees account for almost half of U.S. economic activity, and they employ almost half of all American workers.
These small and local businesses make up the lifeblood of our communities, and they are also the businesses that, unlike their bigger peers, can’t easily recapitalize in order to survive lost revenue to Covid.
How might we provide financing to keep small and businesses alive AND financed in a way that actually empowers our communities rather than asking for more money from already overdrawn state and federal budgets?
What if there were an easier way for community members to invest in local businesses?
The childcare center where my wife and I send our two young kids recently innovated just such a community investment strategy — one with potential for replication by thousands of other businesses around the state.
For families who continued to pay monthly tuition during the center’s closure, the families are buying the rights to a small share of the current owners’ equity and will receive back a profit-share equivalent to around 12% yearly. “We will grant a yearly profit share, based on the total tuition that each family paid while we are closed,” wrote the owners in a letter to families.
In simpler math: someone who paid $10,000 of tuition would be eligible to receive up to 12.5 percent per year or $1,250 of profits. Further, families will retain their ownership in perpetuity, regardless of when their kids graduate or depart the program.
Not bad. Market rate returns from a local business that our family also loves? I’ll take that over blindly investing in Amazon
Clearly, many families can not continue to pay for child care they aren’t receiving. Families who cannot pay were offered several tuition reduction options, including the ability to forego tuition entirely. But for those who can, community based financing is a powerful way to at least keep local businesses alive, and provides a direct stake to make small businesses even more connected to the community.
Granting a profits interest to families in exchange for continued support in effect becomes an act of community investment.
To broaden the lens about how this might apply to other businesses, think about a local restaurant that is struggling to pay overhead because covid has reduced their indoor dining. The owners could offer customers the ability to earn a percentage of future profits by ordering takeout. Forget free appetizers, how about sharing in 1 percent of future profits set aside for everyone who directly orders this month? (Giving diners a real motivation to order directly and to bypass GrubHub, and UberEats)
However our day care center, and thousands of other small businesses, are also struggling how to comply with complex securities laws. The two founders just talked to their lawyer and were almost talked out of it. They said to me on a recent call, “It isn’t that we and other entrepreneurs aren’t getting creative on our financing, but this strategy which seems to so clearly and easily align incentives, is actually legally very complicated to pull off. Who is fighting for the small businesses to make this easier?”
While a handful of groups such as the Main Street Phoenix Project are trying to innovate creative solutions, I’m worried about how many more local businesses will be lost before we have a vaccine. Let’s hope that the politicians, and the securities lawyers can get together to make community financing easier for small business owners across America.