Dean Barber

Big, Small, and the Skinny of It All

In Uncategorized on October 21, 2012 at 8:08 am

There is a long-standing tradition in this country, perhaps more so than anyplace in the world, of being suspicious of anything perceived as being too big.

Mind you, most of us do not want to see an iconic General Motors fail, nor does a majority subscribe to the belief that the only role for the federal government is delivering our mail and defending our shores from attack. Still, most Americans will refrain from celebrating big government or big business.

President Andrew Jackson realized as much when he dismantled a national bank, while President Theodore Roosevelt was hailed as the “trust buster,” targeting certain large corporate conglomerates that he thought had too much controlling interests in the national economy.

Tapping into this anti-big, populist sentiment, Ronald Reagan referred to what he called the nine most terrifying words: “I’m from the government and I’m here to help.”

And if there is a tendency to demonize big business in this country, at least in some camps, we also like to lionize small business, where most Americans are employed.

I think our psyche as Americans is to root for underdogs, those struggling to make right against forces way bigger than themselves. It plays to that notion of rugged individualism and manifest destiny that really is part of our national heritage.

There remains a romantic pioneer notion about entrepreneurship in this country, of going it alone to build something big and lasting. Frankly, I am thankful of that. The American Dream may be harder to come by, but it’s far from dead.

Humble Origins Indeed

And what will always be encouraging is the fact virtually all businesses started off small.  You’ve heard by now the story of Steve Jobs starting his company in his parent’s garage.  Harley Davidson began in a 10-foot by 15-foot backyard shed in Milwaukee. Humble origins indeed.

As a small business owner – providing site selection and economic development consulting services — I will admit to pursuing plans of grandeur, of growing my business into what will become the largest multi-national conglomerate in the Free World. My model, of course, is Kurt Vonnegut’s RAMJAC Corporation.  One of my first takeover targets – Ramen Noodles.

You see, as an entrepreneur, I must have my dreams (even if they are delusional) or I wouldn’t be in business.

Recently, I had the pleasure of listening to a business professor who I thought understood business. David Summers, an associate professor of economic development and entrepreneurship at the University of Houston-Victoria’s School of Business, spoke at the annual conference of the Texas Economic Development Council on small business, dispelling some myths along the way and putting things in perspective.

Not surprisingly, myths do prevail, especially during a presidential election season, when the two candidates are putting their spin to the story on how they are so much better suited for small business than the other guy.

I was able to sit down with the good professor and he pointed me to some very useful sources and statistics, to which I will be reciting as if I am the expert here. (A common ploy by consultants.) In short, what I am saying is that I didn’t make any of this stuff up, and if I get anything wrong, it’s his fault and not mine. (Another typical consultant stratagem.)

So in 2010, there were about 28 million small businesses in this country, responsible for 49.2 percent of private sector employment. But there were also 18,500 firms with 500 employees or more, defined as big business, and they employed the other 50 percent or so.

About half – 52 percent – of all small businesses are home based and 78.5 percent, are non-employers in the sense that they employ only the sole proprietor.  Of the remaining 21.5 percent that do employ anyone, only 10.7 percent of that group will employ more than 20 people.

What those numbers show is not so surprising – that small businesses, almost by their very nature, are typically rather fragile enterprises. Twenty percent will die in the first year. Only about half will make it to five years. About one-third will survive 10 years or more.

And here is more to ruminate on while you are at it. According to the US Census Bureau:

  • Firms with 100 or more employees makeup only about 2 percent
  • Firms with less than 250 employees contribute to 47.6 percent of total employment in 2010; down from a peak of 52.1 percent in 2001.
  • Firms with more than 250 employees contribute 52.4 percent of total employment.

The Buffalo That I Hunt

As a site selection consultant, I will set my sights on corporate America, those 18,500 firms employing roughly half of the private sector and classified by the SBA as big business. Those are the buffalo that I hunt.

In doing so, I subscribe to Sutton’s law which states that when diagnosing, one should first consider the obvious. The law is named after the bank robber Willie Sutton, who reputedly said he robbed banks “because that’s where the money is.”

A similar logic is contained in the physician’s adage, “When you hear hoof beats behind you, think horses, not zebras.”

According to Kauffman Foundation’s annual index of Entrepreneurial Activity (March, 2012), 320 businesses were started each month nationwide in 2011 for every 100,000 adults in the United States. That translates into about 6.5 million startups a year, creating 2.46 million jobs in 2010.

But business starts have been trending downward in recent years and with it job creation. Indeed, according to the Census Bureau, the 2.46 million jobs is down from 2.8 million in 2009 and from the 17-year high of 4.8 million in 1999. In fact, the trend has been down each year since the 1999 peak.

Identify Growth Firms

For economic developers trying to make a difference in their respective communities, identifying growth firms, which represent only about 4 percent of all startups, is probably the best bet. These are businesses that have demonstrated a pattern of growth and have owners that frankly want to grow their business. Some business owners don’t, essentially content on remaining a sole proprietorship.

Also look at certain growth industries, like health care, social assistance, accommodation and food service, professional and technical services. Mind you, there is always risk in trying to pick winners and often the resulting jobs will not be offering stellar wages.

And the truth is that while start-ups do produce the largest number of new jobs, many don’t last. Nationally, since 2008 job losses from firm deaths exceed job gains. It’s clear that the better paying jobs, the more sustainable quality jobs, come from older and larger firms.

And here’s where I preach the importance of business retention and expansion again to economic developers. Concentrate on helping not only your existing older and larger firms, but also those promising young gazelles, those existing growth firms that you have in your community.

If you have a Small Business Development Center in your community, use it and consider the idea of an incubator. The five-year survival rate for Small Business Development Center-assisted businesses is 81 percent and 87 percent for incubator-assisted firms, according Dr. Summers, who again hooked me up with most of this information.

So Far, So Good

According to our friends at the Internal Revenue Service, the average sole proprietorship earned a net annual income of only $13,500 in 2009. So while it is clear that most entrepreneurs will make less money than those who are employed, there is a flip side to that coin. More than 70 percent of all millionaires are, in fact, business owners. In short, the potential for making more money exists by being a business owner.

That’s the message I keep telling my wife, aka “the little general.” So far, so good.

Probably the biggest mistake that I have made in writing this blog was venturing into politics. I did so a few weeks back, soon after the conventions in Tampa and Charlotte. The little general (I was at Fort Benning when she jumped out of a perfectly good airplane five times in one day to get her airborne wings) called me on it.

And, of course, she was right. It served no purpose to my core business to be writing about politics. The blog predictably elicited crazed ravings from partisans.

What I Am Hearing More and More

Now I am not going to tell you how I am going to vote or who you should vote for.  My vote hinges on the economy and the future. And, yes, I am being a bit self-centered in thinking of my own small business prospects.

I do like these Small Business Development Centers scattered around the country that offer technical assistance and training to small business. I think they can be a great and valuable resource. But another part of me cannot help but think that businesses thrive or fail in a free market, and that big government cannot reward competitive businesses any better than getting out of the way.

That’s what I am hearing more and more from business owners — that Washington needs to get the hell out of the way. That sentiment coincides with a nationwide survey in September of small businesses and manufacturers that government is largely viewed as barrier and not a help.

The poll, sponsored by the National Association of Manufacturers and National Federation of Independent Business, concluded there are too many burdensome regulations now in effect that hamstring our competitiveness.

As a small business owner, I think big. (Building the largest multi-national conglomerate in the Free World will take some doing.) But a part of me, too, will always be suspicious of too big.

Dean Barber is the principal of Barber Business Advisors, LLC., a site selection and economic development consulting firm based in Plano, Texas. He can be reached at 972-767-9518 or at dbarber@barberadvisors.com Please visit our website at www.barberadvisors.com

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