Community acquisition for small business recovery

April 28, 2020
Heather Hachigian, PhD
Royal Roads University School of Business Research

The best laid plans have gone awry for researchers everywhere over the last month. But now is not the time to despair over upended research. Research must adapt to emerging realities and contribute to building a more just and resilient future.

Royal Roads’ School of Business and Scale Collaborative recently secured funding for a pilot study on non-profit acquisition for small businesses. Small businesses in Canada are the lifeblood of local economies, yet in 2018, researchers projected that as many as 700,000 would close their doors in the next ten years due to a lack of willing buyers or successors. At the same time, non-profits have faced pressure from funders to generate new revenue streams, including by starting a business from scratch.

Scale saw a ‘win-win’ opportunity for non-profits to acquire successful local businesses and convert them to social enterprises. Scale’s leadership had some first-hand experience with the concept. Lee Herrin was Executive Director of the Fernwood Neighbourhood Resource Group when the non-profit acquired a hair salon and a yoga studio.

The approach allows non-profits to ‘leapfrog’ the risky start-up stage. At the same time, non-profit acquisition provides an attractive exit option for local business owners wanting to retire, while protecting and growing their legacies by providing additional benefits to the new non-profit owner and the community that they serve.

The research planned to estimate how many small businesses in the Vancouver Island region are at risk of closing due to lack of succession plans over the next five to ten years, in which sectors, and which businesses would be most suitable for acquisition by a non-profit. Further legal advice would then be sought to identify the best entity (e.g., a trust, non-profit holding company) to acquire and operate businesses at scale and to share revenues among non-profits.

That was the plan. And then the global pandemic hit. The timeline for small business closures accelerated dramatically from a five to ten-year horizon to months. While emergency funds are helping to keep small businesses afloat in the immediate term, it is unclear what longer-term policy solutions will emerge to maintain the diversity and depth of Canada’s small business ecosystem.

What is clear from past economic recoveries is that there will be winners and losers. Larger businesses that have the resources and capacity to take on additional debt and can take advantage of government loan programs will survive, and may even thrive. Many smaller businesses that do not have the capacity to finance their expenses until sales return will be forced to close their doors for good. Indeed, a survey of small businesses in Canada found that 38% of respondents were at risk of defaulting on commercial rent by April 1 and 70% by May 1st.

For rural communities that depend on local businesses for essential economic activity and the multitude of other community benefits that are often not captured (e.g., physical spaces for social connections), these closures will have resounding negative impacts.

To be sure, non-profit acquisition will not work for all small businesses. There are also many questions about the scalability of the non-profit acquisition model and where the funds for acquisition will come from when the non-profit sector itself is reeling. Public responses to the COVID-19 crisis need to consider the longer-term resiliency of the non-profit sector. A community wealth building and ownership model could achieve the dual objectives of stabilizing local economies through holding small businesses, while also developing new income sources for non-profits.

Through this research, we hope to better understand and pilot test the community wealth building and ownership model and share our learning with other communities across the country through the University of Waterloo’s Leadership Legacy Lab.

We are hiring a summer research student to assist with this work. If you are a small business or non-profit in the Vancouver Island region and are interested in learning more about this research, please email Heather Hachigian.