An impact buyout fund is helping aspiring business owners in US cities acquire profitable, cash-flowing small businesses as a pathway to asset ownership. Rather than launching risky startups, which often fail in their first couple of years, New Majority Capital helps operators buy existing ones with real customers and revenues.
Small business ownership through acquisition isn’t new, but the Rhode Island-based impact private-equity firm emphasizes inclusive business ownership as a strategy for bridging wealth gaps. The “silver tsunami” of retiring small business owners, who represent roughly $14 trillion in enterprise value, presents a major wealth-transfer opportunity in the next decade or so.
“This is a one time opportunity to help take an existing good cash flow generating business, treat it as an asset and help transition ownership of that asset to an underrepresented entrepreneur,” says New Majority’s Havell Rodrigues.
With its new buyout fund, New Majority aims to meet the upfront capital needs of a pipeline of 100 trained and vetted entrepreneurs from diverse backgrounds, including Black and other people of color, women, LGBTQ people, immigrants and other economically-disadvantaged individuals. The fund will combine financing from banks, community development financial institutions, or CDFIs, and/or the U.S. Small Business Administration’s 7(a) loan program to help the entrepreneurs purchase businesses.
“Most people who buy a business already own real estate and they use their real estate as collateral to go buy a business. But if you don’t own real estate, then you’re stuck,” Rodrigues told ImpactAlpha. With access to business ownership, new owners can use excess cash flows of their business “to go and buy real estate,” he added.
New Majority is looking to raise $50 million to provide equity capital to at least 50 entrepreneurs to acquire small businesses. The fund has secured approximately $5 million in commitments, including from Palo Alto, Calif.-based Skoll Foundation.
New Majority’s strategy “offers an equity-centered, non-extractive approach to support underrepresented entrepreneurs and reduce barriers to asset ownership, which is key to building wealth but remains systemically out of reach for many,” Skoll’s Liz Diebold told ImpactAlpha.
“We hope the Skoll Foundation’s investment will enable New Majority Capital to demonstrate high-impact deals that prove out the thesis that small business asset ownership can close wealth gaps,” she says.
Ownership accelerator
New Majority has helped 15 entrepreneurs in Providence, Atlanta, DC and other US cities acquire small businesses thus far. The entrepreneurs receive training from the firm’s bETA accelerator, a 10-week program designed to provide training on how to acquire, run and scale an existing small business.
Rodrigues says these are small businesses that are bringing in between $2 million and $10 million in yearly revenue, and because of their smaller sizes and lack of economic viability, they’re often overlooked by Employee Stock Ownership Plans, or ESOPs, and Employee Ownership Trusts, or EOTs. To drive profit sharing among employees, owners that receive capital from New Majority agree to allocate 10% of their company’s annual profits to their employees.
“Owning equity is great, but actually getting a check at the end of the year is meaningful as well,” Rodrigues says.
For David Owoyemi, a Nigerian native, business ownership is something he has always pursued. As a social entrepreneur in Nigeria, he founded Venture Nation as a digital platform to connect African entrepreneurs in Africa with funding and resources.
“When I got to the US, I began to realize there was this group of underserved entrepreneurs who struggle with access to funding,” Owoyemi told ImpactAlpha. “I was surprised because I always thought that the US had everything figured out. But here was the same problem I was trying to solve back in Africa.”
While he was on the hunt for answers, Owoyemi found out about Majority Capital and its small business via acquisition strategy. Upon completing the bETA accelerator program, New Majority helped Owoyemi secure a $2.1 million financing package, which includes roughly $1.4 million from the SBA and $600,000 in seller financing, to acquire a small landscape installation and maintenance services business in Connecticut. New Majority provided an $84,000 equity check to complete the deal.
“It was a really difficult journey in terms of finding the right business; multiple conversations with brokers, but New Majority was there every step of the way,” says Owoyemi, who completed the purchase of DLTC Landscape Contractors in April this year. The previous owner, who’s in his early 60s, had been running the business for over 40 years.
“My immediate goal is to grow the company to a $20 million business in the next five years, and that’s through a mix of organic growth as well as inorganic growth,” says Owoyemi. “The general manager currently oversees the daily core operations and that gives me time to focus on other things such as growth and more acquisitions.”
Returns on inclusion
New Majority is looking to get a 2X return on its investment and create close to $3 million in wealth during the first five to seven-year period of ownership. Through similar projections, employees will receive between $50,000 to $75,000 in profit-sharing checks over the same period.
New Majority is using a revenue-based repayment model; portfolio owners commit to sharing at least half of their yearly net revenues until they’ve returned twice the fund’s capital.
“We are trying to be non-extractive in the way we are running this impact fund, doing it in a way that there are good incentives aligned, so the entrepreneurs are incentivized to run their businesses smoothly and give us our capital back,” says Rodrigues.
New Majority plans to create back-office services for its portfolio of small business owners, from accounting, bookkeeping and finance to digital marketing, information technology and human resources. The firm will also provide other management and business development support to help ease the pathway to scale.
“As a small business, it’s hard for them to get best-in-class services to figure out what’s the right strategy,” says Rodrigues. “So by having these back-office services that all the portfolio companies can benefit from, we’re sort of partnering with them on that journey.”
