Don’t Forget About NM Small Businesses

BY JOEL VAN ESSEN / ASSOCIATE, CITY DIFFERENT INVESTMENTS

Editor’s Note: Throughout 2022, New Mexico Angels’ members, investors and start-up owners will be writing columns on economic development and startup opportunities in the state. The Angels unite individual investors to pool their resources, providing seed and early-stage capital to startup companies.

Momentum is building in New Mexico — headline-grabbing startups in the burgeoning space technology, green energy and film & television industries continue to dot our desert.

Collaboration between the public sector and private investment groups like New Mexico Angels has made much of this possible. Without that foundation, this entrepreneurial and startup ecosystem wouldn’t be flourishing.

While exciting new startups are undoubtedly crucial for the long-term economic prosperity of New Mexico, we cannot forget our existing small businesses, many of which are family owned and operated. They might not be as glamorous, but they are vital to the sustained economic health of our state. As such, they deserve access to financial capital and support from all stakeholders in the New Mexico economy. Our investment community must focus not only on emerging companies that will be shaping the state’s future but also the small businesses that have defined the state’s past.

According to the Small Business Administration, there are currently 161,921 small businesses in New Mexico, representing more than 99% of all firms. Despite the sheer size and importance of this sector of our economy, small business owners often have difficulty in accessing growth capital, and lack options to sell the business when they are ready to exit. This second point is perhaps the most troublesome.

Baby boomers nationwide will pass on more than $50 trillion in wealth over the next 10 years, much of it in the form of business ownership. According to Wilmington Trust, more than 58% of small business owners do not have that succession plan established. This is cause for concern not only because it can lead to the disappearance of many businesses but also because so much wealth that this generation will need to live on in retirement is currently illiquid. But where there is a challenge, there is opportunity. This demographic shift is creating a unique environment for entrepreneurs and investment firms alike to provide creative financial solutions to these established businesses.

One potential solution is the search fund model, which is when an entrepreneur raises capital from investors to purchase a small business rather than starting something entirely new. Although first conceived in 1984, the model has recently picked up steam and become a popular career path for new business school graduates. For small business owners, selling to a search fund provides liquidity and path to transition the business while still preserving its legacy. To the entrepreneur, this model offers an opportunity to run a business that has already proven it can be successful while eliminating much of the pain with building from scratch.

There is also an opportunity for investment firms to partner with proven operators or the incumbent management team to invest in and acquire these small businesses.

Many small businesses are not large enough to be on the radar of out-of-state private equity groups or strategic acquirers, which is why the responsibility — and opportunity — resides at the local level. We are pursuing this at City Different Investments through our Small Business Acquisition strategy. We’re looking to acquire interests in small businesses in New Mexico to provide owner/operators with growth equity and/or a personal liquidity event.

There are undoubtedly several creative financial solutions on which the public and private sectors can collaborate to provide support for small businesses of New Mexico — all while still achieving economic growth and financial return objectives.

Whatever the solution, it’s essential that our community does not overlook the small businesses (and their owners) that often don’t receive the credit or financial support that matches their contribution to the local economy.

Read on the ABQ Journal’s website here