Building Supportive Ecosystems for Black-Owned Businesses - McKinsey & Company Report

We came across this report posted by the US Minority Business Development Agency (MBDA) that focuses on improving the health of Black businesses by creating supportive ecosystems that include equitable access to capital, building capability and facilitating knowledge-sharing, and expanding opportunities for mentorship. 

Please see some of the report below. 

"The right business ecosystems can mitigate or negate the effects of structural obstacles to business building for Black business owners—and add $290 billion in business equity."

​By David Baboolall, Kelemwork Cook, Nick Noel, Shelley Stewart, and Nina Yancy

​Entrepreneurship and business ownership—particularly of community-based businesses—are crucial ways to develop community wealth, for both business owners and the people they employ. Healthy Black-owned businesses could be a critical component for closing the United States’ Black–white wealth gap, which we project will cost the economy $1 trillion to $1.5 trillion (in 2018 dollars) per year by 2028. The COVID-19 crisis, however, has further stressed Black-owned businesses and may cause the racial wealth gap to widen. This gap includes a $290 billion—and growing—opportunity to grow overall wealth by achieving revenue parity between Black- and white-owned businesses in addition to providing aid to small and medium-size businesses (SMBs)—those with up to 500 employees—with nonwhite owners.

Exhibit 1: Our estimate of the wealth-building opportunity is based on an additional $200 billion per year in revenue for Black-owned businesses that attain revenue parity. We assumed that US private companies’ enterprise value is 2.54 times annual revenue and applied a debt-to-equity ratio of 0.43. These assumptions translate the $200 billion revenue increase to $290 billion in additional business equity. André Dua, Deepa Mahajan, Ingrid Millán, and Shelley Stewart, “COVID-19’s effect on minority-owned small businesses in the United States,” May 27, 2020; Electronic Code of Federal Regulations, Part 121—Small Business Size Regulations, October 5, 2020, sba.gov.

Black business owners have been disproportionately affected by the pandemic-linked economic downturn, partly because they were more likely to already be in a precarious position, including more likely to be located in communities with business environments that are more likely to produce poor business outcomes. Indeed, about 58 percent of Black-owned businesses were at risk of financial distress before the pandemic, compared with about 27 percent of white-owned businesses. (Claire Kramer Mills and Jessica Battisto, “Double jeopardy: COVID-19’s concentrated health and wealth effects in Black communities,” Federal Reserve Bank of New York, August 2020, newyorkfed.org.) 

The pandemic contributed to tipping 41 percent of Black-owned US businesses into closure from February to April 2020. (Robert Fairlie, “The impact of COVID-19 on small business owners: Evidence of early-stage losses from the April 2020 current population survey,” Stanford Institute for Economic Policy Research, working paper 20-022, May 2020, siepr.stanford.edu.)

More than 50 percent of the owners of surviving Black businesses surveyed in May reported being very or extremely concerned about the viability of their businesses. This concern may be linked to having a more difficult time accessing credit since the COVID-19 crisis began; 36 percent of Black business owners responding to the survey said they had experienced this, compared with 29 percent of all respondents. (McKinsey & Company COVID-19 US SMB Financial Pulse Survey, n = 1,004; responses collected May 8–13, 2020, from small and medium-size businesses with less than $500 million in annual revenue.)

Black Americans have never had an equal ability to reap the benefits of business ownership. While about 15 percent of white Americans hold some business equity, only 5 percent of Black Americans do. Among those with business equity, the average Black American’s business equity is worth about 50 percent of the average American’s and a third of the average white American’s (Exhibit 1). (McKinsey Survey of Consumer Finances, 2019.)

Please continue reading the McKinsey & Company report found here. 
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You can also download the full report below. Also feel free to learn more about the Business & Economic Equity Committee and other valuable resources for minority owned businesses. 

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