Small Business

Most people get their definition of "small business" from personal experience in dealing with small retail stores and service organizations. Most people also have a minimum size in mind and overlook a whole category of small business, the very small operations Europeans call "micros"; furthermore, most people do not realize that quite sizeable businesses are considered "small" under U.S. law. Definitions are typically based on the number of people employed or on sales volume, but in defining small business, there is no "one-size fits all." More true is the expression: "Different strokes for different folks," meaning that definitions are based on the economic sector in which a business operates. Small business may also be defined by a way of looking at the world; it has a cultural meaning; it is a way of life. Thus the definition has qualitative aspects the law doesn't care about. A quite small business may behave like a very large one because its owners have a certain view; conversely quite large corporations are sometimes still run like small businesses and exemplify the values of small business.

OFFICIAL SIZE DEFINITIONS

In most industrialized countries small businesses are treated in special ways. They are eligible for financial programs or get favored treatment under the tax laws. For this purpose governments publish official size standards. In the U.S. such definitions are issued by the U.S. Small Business Administration's Office of Size Standards. SBA's basic definition begins with a listing of common features. A small business must be 1) organized for profit; 2) have a place of business in the United States; 3) make a significant contribution to the U.S. economy by paying taxes or using American products, materials, or labor; and 4) be at or below the numerical size standard for its industry. So what is this size standard?

U.S. Size by NAICS

SBA determines size for businesses in Manufacturing, Wholesale Trade, Mining, and certain other specific industries by employment size. For others it uses revenue size except in Banking, where asset size rules. Manufacturing enterprises with 500 and fewer employees are small businesses, although there are some industries within that sector with higher tilt-points, as discussed below; in the Wholesale Trade sector, the upper limit is 100 employees. This number is widely used as the definition of smallness in ordinary assessments and in eyeballing small business generally. The number is easy to remember; it is easier to get a headcount than revenue data; and Census data on employment by firm are readily available. But the "100-and-under" definition is official only for businesses in the wholesale trades.

For businesses in all other fields the definitions are based on revenue; this makes it easy for the small business to establish its own eligibility but much more difficult for analysts of small business to classify a population of companies as "small" or "large." In descending order of revenues, the major sectors (as summarized by SBA) are:

• General and Heavy Construction, $31 million
• Dredging (technically part of construction but singled out here), $18.5 million
• Special Trade Contractors, $13 million
• Retail Trade and Business and Personal Services, $6.5 million
• Architectural, Engineering, Mapping Services, Dry Cleaning and Carpet Cleaning Services, $4.5 million
• Travel Agencies, $3.5 million
• Agriculture, $750,000.

Businesses in these categories may maximally have the revenues shown and still be considered small businesses. The values thus represent upper limits.

These summaries, however, are not the detailed definitions. Those are published by the SBA in a special Table organized by North American Industrial Classification System (NAICS) codes (see references). The Table lists exceptions, typically showing larger sizes for certain NAICS industries. To illustrate, within the Agriculture Sector, where the top is generally defined as $750,000 in revenues, Feedlots may have revenues up to $2 million, Chicken Egg Production up to $11.5 million, Forestry operations up to $6.5 million, and Logging may have 500 employees. Fishing operations top out at $4 million, and Agricultural and Forestry Support activities are $6.5 million except Forest Fire Suppression and Fuel Management Services where the top size is $16.5 million. The example illustrates that summary data are very general. The business owner needs to obtain his or her NAICS code and then look at the Table for the precise definition for his or her operation.

The Table also includes whole sectors left out of the summary such as Mining (generally 500 employees); Utilities (4 million megawatt hours a year or less); Transportation (1,500 employees for airlines, long haul rail, and pipelines; 500 for water transport; $23.5 million in revenues for Trucking; $6.5 million for others); Information (500 employees for Publishing, 1,500 for Telecommunications); Real Estate and Rental ($2 million is the smallest revenue category for Real Estate Offices, $23.5 the largest for Vehicle and Truck Leasing); Finance and Insurance ($165 million in assets for Banks; $6.5 million in revenues for an insurance brokerage); and there are others.

IN CANADA AND EUROPE

As reported by GDSourcing, a company that retails Canadian federal statistics, Canada divides its small business into two categories, "small" and "medium." The small business is defined as one with revenues between $30,000 and $5 million whereas a medium-sized business has revenues between $5 million and $25 million. The dollars are Canadian. Generally, in Canada, the United Kingdom, and other former British Commonwealth countries the small business sector is referred to as the SMEs, which includes both categories: small and medium enterprises.

Based on data from the University of Strathclyed in the UK, the British definition of "small" is sales ("turnover") of not more than £5.6 million, assets of not more than £2.8 million, and not more than 50 employees. A medium-sized company has sales of £22.8 million, assets of £11.4 million and not more than 250 employees. The definitions were set by the UK's Companies Act of 1985, as amended in 2004, for tax purposes. The British Bankers Association defines small business customers as proprietorships, partnerships, and companies with annual sales under £1 million.

The European Commission, in its Recommendation 2003/361/EC (May 6, 2003, effective January 1, 2005) has three categories for small business: micro enterprises have fewer than 10 employees and sales and assets both less than €2 million each. Small enterprises are defined as having fewer than 50 employees and sales and assets of €10 million each or less. A medium-sized enterprise has fewer than 250 employees, sales of not more than €50 million, and assets of not more than €43 million.

COMPANY DISTRIBUTION BY EMPLOYMENT

Just how big a role does small business play in American commerce? Data for 2003 available from the U.S. Census Bureau enable us to get a general feel. In that year the U.S. economy had 5.8 million companies employing 113.4 million people. The census provides breakdowns by employment range such as 1-4, 5-9, 10-19, 20-99, and 100-499 employees. Using all employment brackets up to the 20-99 category, the closest approximation to the "100-and-under" category generally used for defining a small business, data for 2003 showed that 98.2 percent of all firms could be classified as small. These companies employed 36.2 percent of all people working for the profit-making private sector. This means that the overwhelming majority of all companies are small and employ well over a third of private-sector workers. Big business, with just 1.8 percent of companies, however, employs the majority of people, 63.8 percent. This rough approximation, of course, understates the total for small businesses because in major industries a much higher employment cut-off is used (e.g. 500 employees). But we can test this number by looking at three major industries for which the SBA specifically identifies employment size as the cut-off: Manufacturing and Mining (500 in each case) and Wholesale Trade (100 employees).

In Manufacturing, 295,596 companies were active in 2003. Of these 291,494 had 499 or fewer employees. Thus 98.6 percent of Manufacturing firms were classified as small business. They employed 43.2 percent of the manufacturing workforce. In Mining 98.3 percent of companies were small (17,896 of 18,210) and employed 44.2 percent of the workforce in the industry. Finally, in Wholesale Trade, 331,633 of 342,450 firms fell into the 99 or fewer employee category—96.8 percent of companies. They employed 45.3 percent of those engaged in wholesale trade.

These three sectors in aggregate represented 11.4 percent of all firms and 18 percent of total employment. Small businesses within them were 11.3 percent of all small businesses and represented 21.8 percent of small business employment.

AMERICA'S "MICROS"

The data cited above exclude a very large category of tiny businesses—those that do not have employees at all. Their owners earn business income and are not paid a salary. The Census Bureau classifies these entities as "nonemployer businesses." They are America's own "micro" enterprises—the seeds from which small businesses with employees develop. Data released by the Bureau in connection with Small Business Week in 2006 indicate (again for the year 2003) that 18.6 million such businesses existed. They had revenues of $830 billion, equivalent to $44,623 per entity.

Who are these people? They are engaged across the board in every industrial sector, albeit, obviously, at a very small scale. An indication is provided by categories that had particularly strong growth between 2002 and 2003. They were real estate appraisers growing by 19.1 percent, nail salons (15.9 percent), landscape architectural services (14.6 percent), software publishers (14.4 percent), clothing accessories stores (12.9 percent), bed and breakfast inns (8.5 percent), carpet and upholstery cleaning services (7.5 percent), and confectionery and nut stores, growing 6.5 percent between 2002 and 2003.

The Census Bureau's press release also identified the biggest sectors as follows: "Four economic sectors accounted for almost 60 percent of nonemployer receipts in 2003—real estate and rental and leasing ($176.0 billion, or 21.2 percent); construction ($126.4 billion, or 15.2 percent); professional, scientific and technical services ($102.9 billion, or 12.4 percent) and retail trade ($80.5 billion, or 9.7 percent)."

The growth rate of nonemployer revenues was 5.7 percent between 2002 and 2003, the largest annual increase since the Bureau began collecting such statistics in 1997. The growth rate, of course, may in part be a reflection of bad news: individuals affected by slow recovery, outsourcings, and layoffs may have been, as it were, "fighting back" by creating a modest income for themselves by enterprise.

A DIFFERENT CULTURE

Anybody who has ever worked in or run a small business will be aware of a difference in culture between "small" and "big" business. The difference arises from structural factors, of course, but equally from different values. To be sure, in specific cases a small business may have "big business" values and attitudes arising from the experience and intentions of the owners. On the whole, however, the small business culture is marked by close and familiar contact between owners and employees; and the business as a whole is close to the outside world—customers, neighbors, and suppliers. Structural factors arise because communications in a small business are easy and informal; there is much less layering; contact with the world is immediate and does not require expensive market surveys. The owners very often work within the business and are not the abstract and distant symbol of a faceless stockholder somewhere out there. Much more so in small businesses than in large, the enterprise has a "family" or "tribal" atmosphere and the predominant value is continuity and survival rather than abstract concepts like profit, return, and asset appreciation. Being in close and direct contact with the environment ("belly-to-belly" as Japanese business people say), with information flow rapid and decisions easier to make and to implement, small businesses tend on the whole to be capable of rapid reaction—but are also limited by limited means.

The small business environment is both more open, free, quick, and "organic" than large structures where size alone imposes bureaucratic methods of control and slow communications through many layers of decision-makers. For this reason a highly disproportionate number of innovations arise first in small businesses. And, as the SBA points out, small business is also the source of most new jobs: 75 percent of net new jobs added to the economy come from small business. When it comes to the future, one can confidently say: "Small is beautiful."

BIBLIOGRAPHY

"Canada's Small Business Data Centre." GDSourcing. Available from http://www.gdsourcing.ca/SBDC.htm. Retrieved on 18 April 2006.

"Small and Medium Sized Enterprises: Definitions." University of Strathclyed. Available from http://www.lib.strath.ac.uk/busweb/guides/smedefine.htm. Retrieved on 18 April 2006.

U.S. Census Bureau. "Statistics of U.S. Businesses: 2003." Available from http://www.census.gov/epcd/susb/2003/us/US-.HTM. Retrieved on 18 April 2006.

U.S. Census Bureau News. "Small Business Week 2006." Press Release. 27 March 2006.

U.S. Small Business Administration. "Small Business Statistics." Available from http://www.sba.gov/aboutsba/sbastats.html. Retrieved on 18 April 2006.

U.S. Small Business Administration. "Summary of Small Business Size Standards." Available from http://www.sba.gov/size/summary-whatis.html. Retrieved on 18 April 2006.

U.S. Small Business Administration. "Table of Small Business Size Standards Matched to North American Industry Classification System Codes." 5 January 2006. Available from http://www.sba.gov/size/sizetable2002.pdf. Retrieved on 18 April 2006.

                                     Darnay, ECDI

Small Business/Large Business Relationships

Many small business owners see large businesses exclusively in competitive terms. For small enterprises that compete directly with larger companies, this characterization is an accurate one. An independent record store owner, for example, will undoubtedly—and legitimately—regard the arrival of a new record store operating under the banner of a national chain as a threat. Similarly, a small plastics manufacturer will view larger firms engaged in the same industry sector as competition. But small businesses should recognize that large regional, national, or even international companies can take on other, decidedly more attractive, identities as well. Larger companies may assume roles as business partners, product distributors, or customers. Indeed, large enterprises wear different hats to different observers. One small business's aggressive competitor may be another small firm's business ally, distributor, or client.

LARGE BUSINESSES AS PARTNERS

The 1990s saw a general increase in business partnerships between small and large companies. Alliances between large companies are still more prevalent, and many large firms continue to prefer to simply swallow up smaller enterprises via acquisition, but analysts and consultants alike contend that growing numbers of large companies are recognizing the benefits that can accrue from establishing partnerships with nimble, entrepreneurial firms. Small but growing companies can offer mature partners access to new customers, innovative products and management practices, and opportunities to bask in the glow of the small business's innovative, contemporary image. This is especially true in the biotechnology sector and in other industrial sectors characterized by rapid change and innovation. Partnerships of this sort often cross industry boundaries as Myron Gould explained in Direct Marketing, "Partnerships can be formed in the profit and nonprofit sectors, in the same or different industries, within different divisions of the same company, and in similar market segments/demographics in non-competitive industries."

Indeed, many observers believe that in recent years, festering suspicions and stereotypes in both the large- and small-business camps about the motivations and abilities of the other have begun to give way to an increasing recognition of the positives that can be gained by working cooperatively. James W. Botkin and Jana B. Matthews, authors of Winning Combinations: The Coming Wave of Entrepreneurial Partnerships Between Large and Small Companies, stated that "entrepreneurs and corporate executives now need each other more than ever. Their needs and their strengths are often opposite and complementary. Both large corporations and small companies can brighten their global prospects by forming collaborative partnerships that capitalize on their complementary strengths while respecting the independence of each party."

Well-managed smaller companies have long proven themselves to be very adept at anticipating market trends, capitalizing on new technologies, and using their lean structures to outpace larger companies. But while their small size enables them to evade the lumbering bureaucracies that hamper the actions of all but the most progressive larger companies, small companies are also limited by certain realities that can be easily addressed by big firms, and these impediments are often emphasized if the small firm hopes to establish a presence beyond its domestic borders. "Increasing globalization … makes it difficult for small entrepreneurial companies to act alone effectively," wrote Botkin and Matthews. "Their marketing and distribution channels are frequently inadequate for getting their innovative products and services to an international marketplace. The continual need of small companies for capital also limits their maneuverability. The time and attention of their entrepreneurial management is often diverted to finding and negotiating financing instead of developing markets and distribution systems…. Though their innovations may be exactly what the marketplace needs and wants, they are likely to be handicapped in reaching it."

Large firms are an obvious source of assistance in many of the above areas—distribution, financing, marketing, etc.—but small businesspeople have a tendency to regard large corporations with suspicion. After all, many entrepreneurs come from corporate environments that were not necessarily characterized by adherence to any code of business ethics, and American corporations have not always shown respect for small business autonomy. "Given the 'big fish eats little fish' history of large-to-small encounters, founders of small companies may understandably be leery of forming partnerships that they fear will destroy their company's autonomy and identity," admitted Botkin and Matthews. "But this need not be the case. We suggest that any partnership offer be examined critically and carefully. Entrepreneurs must learn to discriminate between corporate sharks with a bite and swallow mentality and those suitors who have a mutually beneficial arrangement in mind. It's natural to be suspicious. However, many founders of small businesses write off strategic alliances altogether, closing off what might be an increasingly important avenue of rapid growth."

Keys to Successful Partnerships with Larger Companies

Following are several tips that entrepreneurs should consider when negotiating and maintaining a partnership with a larger company:

Research. Some partnership offers sound great on the surface, but are fraught with unpleasantness under the surface. Entrepreneurs should make sure that they undertake diligent research so that they can best assure themselves of finding the right partner, for as Botkin and Matthews admitted, "not every partnership yields happy results; ill-conceived partnerships can leave your company in worse shape than before. Bad partnerships, like bad marriages, can drain resources, end up in costly litigation, and sour both partners on future relationships." Typically, however, warning signs will be there for the small business owner who takes the time to look.

Fundamentally sound business practices. Entrepreneurs hoping to secure a partner to bankroll their R&D efforts or market their products are wasting their time if they do not have a viable business already in place. If the small company's business practices are shoddy, disorganized, or incomplete, large companies will be sure to notice.

Recognition of own responsibilities. Entrepreneurial companies can reap many benefits from partnering with large firms, but they need to recognize that those big companies are for-profit enterprises; they expect something in return for their financial, marketing, and/or management help.

Monitor requirements of successful partnership. Many partnerships with larger companies require entrepreneurs to make a greater commitment to their business in order to meet the obligations and conditions explicated in the partnership agreement. If the entrepreneur in question launched his or her business for the express purpose of realizing greater personal wealth or establishing a significant presence in a given industry, finding the desire to meet those partnership obligations should not be a problem. If, however, the entrepreneur launched his or her venture in order to stake out a lifestyle of independence and travel, that person may want to weigh the sort of impact that the partnership could have on those aspects of his or her life.

Do not be intimidated. The trappings of the corporate world (high-rise buildings, cavernous conference rooms, legions of blue suits, etc.) can be intimidating, but small business owners have to remember that they run viable businesses of value themselves, and they should negotiate accordingly.

Maintain independence. Autonomy is assured if you maintain ownership, so be leery of turning over too much equity in the business in exchange for financial help.

Establish clear and open lines of communication. Good communication practices are essential to all business relationships, both internal and external, and alliances with large companies are no exception.

LARGE BUSINESSES AS PRODUCT DISTRIBUTORS

Myriad small manufacturers rely on major mass merchandisers (regional, national, or international) to sell their goods. Indeed, these distributors can dramatically heighten a small business's fortunes in a matter of weeks or months. But entrepreneurs seeking to establish such relationships will find that 1) competition to secure a place on the shelves of major retail outlets is fierce, and 2) some mass merchandisers will be better suited for the small business's product than others.

Competition

The single most important factor in securing a distribution agreement with a major retailer is, of course, having a quality product that will sell. But small business owners seeking to establish themselves with a major mass merchandiser also need to make sure that they attend to myriad other business matters every step of the way. After all, the mass merchandiser in question has plenty of product options from which to choose; if your company stumbles at any point, there are plenty of other competitors waiting to take your place on the merchandiser's shelf. Given that reality, entrepreneurs have to make sure that they have a dependable production/delivery operation in place. In addition, small business owners should be prepared to provide prospective distributors with information on the firm's management and financial situation.

Compatibility

Moreover, entrepreneurs need to make sure that they concentrate their efforts on finding mass merchandisers that already sell products to the new product's probable demographic audience. For example, an expensive, "high-end" home furnishing product is more likely to be compatible with the existing product lines of an upscale retailer than one of the major discount retailers (Kmart, Wal-Mart, etc.). Conversely, an inexpensive but functional item that would be commonly used might be better suited to discount outlets rather than Nordstrom's or some other high-end retailer.

LARGE BUSINESSES AS CUSTOMERS

Many small businesses, whether involved in retail, wholesale, manufacturing, or services, count fellow businesses as significant or primary customers. Pleasing corporate clients is in many fundamental respects no different than pleasing individual customers. As Richard Gerson observed in Great Customer Service for Your Small Business, "much of customer service comes down to plain old common sense. Simply put, customer service involves everything you and your employees do to satisfy customers. That means you give them what they want and make sure they are happy when they leave. If you just manage complaints, offer refunds or exchanges on returns, and smile at customers, you only provide a small part of excellent customer service. Customer service also means going out of your way for the customer, doing everything possible to satisfy the customer, and making decisions that benefit the customer—sometimes even at the expense of the business [depending on the customer's future potential]."

However, corporate customers sometimes have different needs and priorities than do private individuals, and small businesses that do not recognize these differences are unlikely to provide service that will be acceptable in the long term. For example, delivery deadlines are often far more important for businesses than they are for regular customers. Late delivery of a service or product may constitute no more than a minor convenience to a private-sector customer, but it might mean significant monetary loss for a corporate customer that was depending on that delivery to meet deadlines imposed by its own customers.

Small business owners are painfully aware of the fact that the loss of a single corporate customer often constitutes a much more severe blow to a business's health than does the loss of a single retail consumer. Whereas businesses that provide goods or services to the general public will have many customers, establishments that provide their goods or services to corporate clients will in all likelihood have far fewer customers. The loss of even one such client, then, can have a significant impact because of the percentage of total business that the customer represents. Finally, businesses that rely on corporate clients are more likely to encounter higher levels of paperwork and bureaucracy to satisfy the recordkeeping apparatus of their clients.

BIBLIOGRAPHY

Ansary, Mir Tamim, and John De La Mothe. Networks, Alliances and Partnerships in the Innovation Process. Springer, 2002.

Botkin, James W., and Jana B. Matthews. Winning Combinations: The Coming Wave of Entrepreneurial Partnerships Between Large and Small Companies. John Wiley & Sons, 1992.

Buvik, Arnt, and Kjell Gronhaug. "Inter-firm Dependence, Environmental Uncertainty, and Vertical Coordination in Industrial Buyer-Seller Relationships. Omega. August 2000.

Doz, Yvez L., and Gary Hamel. Alliance Advantage: The Art of Creating Value through Partnerships. Harvard Business School Press, 1998.

Gerson, Richard F. Great Customer Service for Your Small Business. Crisp Publications, 1996.

Gould, Myron. "Partnering for Profit—How to Achieve Impressive Cost-Benefit Results." Direct Marketing. February 1997.

Neuborne, Ellen. "Small Business, Big Client: Leveraging your size to snag a mammoth customer." Sales & Marketing Management. October 2003.

"Small Firms Have Big Advantages." Mortgage Strategy. 30 May 2005.

Wilhelm, Wayne, and Bill Rossello. "The Care and Feeding of Customers." Management Review. March 1997.

                                 Hillstrom, Northern Lights

                                  updated by Magee, ECDI

Small Business

Does Size Really Matter?

With multibillion-dollar corporate mergers dominating the business news throughout the 1990s, it is counterintuitive to think of small companies flourishing and prospering. Most did not; approximately three out of five (60 percent) small businesses begun in the decade failed. Those that did thrive were often the targets of corporate takeovers or buyouts. Yet, by the end of the decade, small businesses accounted for 99 percent of the 23.3 million nonfarm businesses in the United States, according to statistics compiled by the Small Business Administration (SBA). Sole proprietorships made up 16.7 million of these small businesses, while 1.6 million were partnerships and 5 million were corporations. The SBA noted that these figures were based on tax returns, so the number of sole proprietorships may be inflated by artists, freelance writers, and other self-employed persons who were not technically businesses. As of 1996, the last year for which complete statistics are available, small businesses employed 53 percent of the workforce in the private sector, made 47 percent of the sales, and accounted for 51 percent of the total private sector output. According to the Department of Labor, approximately 750,000 small businesses were created each year; about 10 percent, or 75,000, of them failed within the first ten to twelve months of operation. Those that succeed, however, often do better than their bigger counterparts; the most successful far outperformed their larger counterparts, generating an average annual sales growth of 59.8 percent and an average annual earnings growth of 102.8 percent during 1996 and 1997. Companies listed on the Standard & Poor's (S&P) Industrial Index, by contrast, achieved an average annual sales growth of 7.6 percent and average annual earnings growth of 9.8 percent during the same period. The return on capital investment among the best one hundred small businesses averaged 31.1 percent, while the S & P average was only 11.9 percent. Small business, however, did not fare as well on Wall Street. Throughout the 1990s, big caps consistently out-performed small caps in the stock market. When small caps began to make advances in the second half of 1997, the Asian financial crisis killed the rally. While the S & P 500 stock index rose nearly 32 percent in 1997, the Russell 2000, a barometer for small-company stocks, rose only 22 percent. Small businesses, nevertheless, remained an attractive potential investment. Small-cap stocks were considerably and consistently cheaper than the stocks of large corporations, and the price-to-earnings ratio of small-caps, although not as high, was still viable. As of 1998 the price-to-earnings ratio of the S& P 500 was 22.4, based on an earnings growth of 10.2 percent. The price-to-earnings ratio of the Russell 2000 was slightly lower at 20.4, but with a much higher earnings growth of 20.6 percent. Those numbers, especially the high growth rates, kept enough investment and venture capital flowing into small businesses to produce some stunning results.

Three Small Businesses That Succeeded

No single type of small business provided the design for success. Small businesses that hit it big during the 1990s engaged in a wide array of enterprises, from drug testing to software troubling-shooting to motor sports, horse racing, and gaming; they had in common, however, a combination of business savvy, clear focus, and relentless discipline that enabled them to outperform even their larger rivals. Among the most successful and fastest growing small businesses was Kendle International Inc., a drug-testing company located in Cincinnati, Ohio. In 1998 Kendle topped the list of Hot Growth Companies compiled by Business Week. Between 1994 and 1997 its revenues expanded at the astounding annual rate of 168.9 percent, to $44.2 million. During that same period, net income grew 158.8 percent annually, to $3.7 million. The company also boasted an average annual return on capital investment of 59.3 percent. In the early 1990s, however, Kendle, despite a reputation for integrity and reliability in running clinical drug tests, was losing business to larger and more well-known competitors. The owners, Candace Kendle Bryan and her husband Christopher C. Bergen, began making plans to go public, which the company did in August 1997. Since then the value of Kendle stock has risen steadily and the company began to acquire other laboratories. In 1998 its sales nearly doubled to $84.5 million, with earnings growing 148 percent, to $6.2 million.

ROLL-UPS

The brainchild of venture-capital investor Steve Harter, "roll-ups" was an unusual and innovative way to bring together small companies engaged in similar businesses. Beginning in the early 1990s, Harter approached several companies and arranged for an IPO to buy the companies and combine them into a single unit. The earnings allowed the entrepreneurs to buy additional companies. In the process, many employees and managers of the small companies became millionaires through the stock options offered to them. Harter's critics, who dubbed the "roll-ups" as "poof IPO's," claimed that it was often difficult to integrate several different companies and that, if the new company grew too quickly, the whole deal could collapse, leaving stocks tumbling, investors out of luck, and companies in ruins.

Aris Corporation

For Paul Song, chairman and CEO of Aris Corporation, the computer network and software problems that cause expensive headaches for other companies are the stuff profits are made from. The specialty of Song's company is making the latest software easy to use. Although Aris, based in Bellevue, Washington, competes with the giants such as Andersen Consulting, revenues soared at an annual rate of 96.8 percent between 1994 and 1997, reaching a high of $55 million with net earnings of $5.3 million. When Song launched Aris in the early 1990s, he had only $1,000 in a savings account and an answering machine. He won his first big contract to help the Weyerhauser Company implement a computer network that would track information from its lumber mills to its box plants. By the end of the decade Aris had become a six-hundred-person operation serving the likes of Boeing, the Internal Revenue Service (1RS), and Lockheed Martin. Song realized as early as 1993 that in addition to fine-tuning networks and software, there was money to be made in offering technical support and training after the system was up and running. By 1997, 39 percent of company revenue derived from such training classes. Aris even instructs the marketing staff at Microsoft on how to use its own Exchange email program. Aris went public in 1997 and raised sufficient capital from its initial public offering to acquire four rival companies in the United States and two British consulting firms. In 1998 its revenues rose 64 percent, to $90 million, and profits rose 36 percent, to $7.2 million.

Dover Downs

When Dover Downs Entertainment Inc. opened Dover Downs, a horse-and-motor racetrack, in 1969, the project and the company nearly failed. By the mid 1990s, however, thanks to the booming gaming and motor-sports business, the company racked up an average annual revenue growth of 99.8 percent and an average annual earnings growth of 70.9 percent between 1994 and 1997, to accompany a 31.6 percent return on invested capital. Since going public in October of 1996 the value of its stock had risen 85 percent. "They've evolved from an undervalued little company into a real growth story," said Kevin C. Holt, a research analyst at Strong Capital Management, Inc., which holds nearly 130,000 shares of Dover stock. Dover Downs can thank the state of Delaware for some of its good fortune. In 1994 the state legislature passed a law that permitted horse-racing tracks to install slot machines. The law was a boon to Dover Downs. Gaming revenues increased from less than $1 million in 1994 to $81 million by 1997. In March 1998 the legislature passed an additional law that doubled, to two thousand, the number of slot machines permitted at any one location. The income from gaming funded an aggressive program of expansion. In the fall of 1997 Dover purchased Nashville Speedway USA for $3 million and, in conjunction with Gaylord Entertainment, is building a $40 million racing complex outside of Nashville. In March 1998 Dover struck a deal to merge with the Grand Prix Association of Long Beach, California, which owns tracks in St. Louis and Memphis. Those deals gave Dover Entertainment a coast-to-coast presence and, by the end of the decade, vaulted it into the big leagues of auto racing.

Three Small Businesses That Failed

During the 1990s small businesses also failed for a variety of reasons. Most commonly, however, they ran into serious trouble when they miscalculated the market for their products, misunderstood their competition, or moved into new enterprises without adequate preparation or for which they may have been illsuited. In 1996 Parlux Fragrances Inc. exuded the aroma of success. The company had enjoyed double digit profit increases under the leadership of Illia Lekach, a Russian immigrant, and garnered $8 million in earnings from $68 million in sales by March 1996. Since then, however, its performance has not smelled as sweet. In both 1997 and 1998 Parlux lost almost as much as it made in 1996, with losses averaging about $6.7 million per year. The value of its stock dropped 81 percent by the end of April 1998, and Lekach admitted that Parlux "suffered from a series of mistakes." The most serious problems seem to have arisen from the introduction of Perry Ellis America in 1996, a fragrance named after the clothing designer who died in 1986, because it was unable to compete with another product that appeared at the same time: Tommy, marketed under the name of the fashionable designer Tommy Hilfiger. The fate of Parlux provides a cautionary tale for other small companies, showing how quickly even successful businesses can falter and fail. If the earnings projections of Wall Street stock analysts are not met, the results can be disastrous.

Other Disasters

Another promising small company, Lafayette Industries Inc., fared even worse than Parlux. Lafayette enjoyed considerable success manufacturing display cabinets for department stores. Buoyed by its achievements, Lafayette took a wrong turn in 1995 into the manufacture of, among other things, debit-card vending machines, The transformation failed and in March 1997 Nasdaq removed Lafayette stock from its small-cap listing; the company continued to flounder. Netmanage Inc., which produced software that enabled desktop computers to access the Internet, also experienced a similar fate. The company found itself awash in a sea of red ink when Microsoft Windows 95, which bundles in the same Internet features, made Netmanage's software package superfluous to PC users and thus captured and dominated the market Netmanage sought to enter. As a result, the stock value of Netmanage plummeted 76.3 percent by 1998.

Sources:

Amy Barrett, "Hot Growth Companies," Business Week (1 June 1998): 70-74.

Barrett, "Speed Demon," Business Week (1 June 1998): 82, 86.

Seanna Browder, "A Software Tuner and Coach," Business Week (1 June 1998): 78, 82.

Peter Gaiuskza, "The $44 Million Mom-And-Pop/3 Business Week (1 June 1998): 74-76.

Small Business-Dominated Industries

The United States supports many industries that are dominated by or heavily populated with small firms. The majority of these are in the services sector, a fact that reflects the growing dominance of this sector in the overall American economy. Industries that tend to be more easily entered tend to be favorable for small businesses. A need within some industries for heavy investment early on, as would be the case for somebody wishing to enter the cement manufacturing business, makes these industries less hospitable to the small business. It is not surprising, therefore to see the list of industries that the U.S. Census Bureau reports as having the fewest small businesses involved. They are: Accommodation and Food Service; Educational Services; Manufacturing; Mining, and Utilities. When it comes to industries in which the small business plays a dominant role, the U.S. Small Business Administration reported that the fastest-growing such industries in the country were as follows:

1. Employment Agencies
2. Real Estate
3. Automotive Dealers and Service Stations
4. Building Materials and Garden Supplies
5. Automotive Services, Except Repair
6. Millwork, Veneer, and Plywood Manufacturing
7. Paint, Paper Hanging, and Decorating
8. Meat Markets and Freezer Provisioners
9. Retail Stores
10. Agricultural Services

These industries are expected to see continued growth over the coming years, as increasing numbers of small businesses enter the marketplace. But many analysts, citing studies conducted by the SBA's Small Business Advocate office, believe that some other industries friendly to small business are poised for even greater growth. Indeed, statistics compiled by the SBA, the Department of Labor, the Bureau of Labor Statistics, and Monthly Labor Review indicated that high rates of growth can also be expected in such business areas as residential care, collection agencies, child day care services, travel arrangement services, equipment rental companies, accounting and bookkeeping services, public relations, and family services.

Residential Care

Residential care encompasses a variety of facilities, including those devoted to caring for emotionally disturbed adolescents and mentally retarded individuals, but government data indicates that the area in which residential care will see its greatest growth is in the realm of elder care. Analysts expect growth in assisted-living facilities—which range from domiciliary care homes and personal care homes to adult congregate living facilities—to serve as the engine that drives this industry forward over the next few years, as the American population ages and workers explore various elder care options. "These facilities," wrote Jenny McCune in Journal of Business Strategy, "are a bridge between traditional nursing homes, which offer round-the-clock, skilled medical care in an institutional setting, and independent retirement housing, in which residents receive no outside help. In assisted living, the elderly live as independently as possible—usually in suites or cottages—but also have access to meal and laundry facilities and get assistance with daily chores such as bathing and dressing." Business consultants and current participants in the industry warn, however, that while demand for these services will continue to grow in the coming years, entrance into this business area is costly.

SELECTED HIGH-GROWTH INDUSTRIES FOR SMALL BUSINESS

Child-Care

The child-care services industry has enjoyed steady growth for a number of years, due to population increases and the growing presence of women in the business world. And as McCune noted, the popularity of child-care facilities in recent years has also been driven by the increased professionalism of the industry, as evidenced by the development of accreditation standards. The sheer demand for child-care services is expected to insure the continued health of many businesses engaged in this area for years to come, but entrepreneurs should be aware of the hazards that lurk here as well. Business experts note that concerns about child welfare have sparked increased calls for regulation of the industry by OSHA and other government agencies, and that participants face a host of competitors. "A for-profit center may be competing with non-profit centers sponsored by religious organizations, the local Head Start program, family members who baby-sit for little or no cost, caregivers who work in the home, and even after-hours programs run by local elementary schools." Finally, professional day care centers have to grapple with liability issues, encroaching involvement of larger firms, and historically high levels of turnover both among clients and employees.

Collection Agencies

The surge in credit availability in American households has sparked a corresponding increase in demand for businesses willing to pursue collections for clients. As one industry participant told Journal of Business Strategy, establishing a business in this area is attractive to some entrepreneurs "because the cost of entry is low—someone can start out with a phone and a personal computer in a spare bedroom—and clients generally accept smaller vendors." Another business owner in the industry observed that effective collection agencies will particularly benefit from increasing demands from clients such as credit card companies; doctors, lawyers, and other professionals; and health care firms. Moreover, many observers believe that privatization initiatives by local, state, and federal government agencies will provide collection agencies with additional business.

Travel Agencies

Travel and tourism is a huge business area both in the United States and around the world, and independent travel agencies have benefited accordingly. Both business and recreational travel continue to rise in all geographic regions of America, but the hectic pace of modern life has made many of these travelers look to agencies to take care of the specifics of their journeys, from itinerary planning to plane reservations. McCune noted that travel agents do face some challenges today, including slimmer profit margins (because of competitive fares, etc.) and what amounts to a mandate to provide top-level service (since travelers can either go to competitors or make travel arrangements themselves). But she added that travel agencies that are able to improve productivity through available technology can dramatically increase their prospects for success, and noted that "becoming a specialist in a particular type of travel also gives agencies an edge. [In the mid-1990s], cruises, adventure travel, and eco-tours are what's hot. In addition to being in demand by consumers, such packaged tours also offer better margins. Of course, the key to succeeding in the long run is an ability to uncover the next trendy market in travel. That requires a study of demographics—like the aging of the population and the rise of dual-income families—to identify up-and-coming niches."

see also Clusters; Economies of Scale

BIBLIOGRAPHY

McCune, Jenny. "The Face of Tomorrow." Journal of Business Strategy. May-June 1995.

Porter, Michael E. Competitive Strategy: Techniques for Analyzing Industries and Competitors. Free Press, 1998.

Schiffer, Mirjam. Firm Size and the Business Environment: Worldwide Survey Results. World Bank Publications, 2001.

"Top 10 Small-Business-Dominated Industries." Journal of Accountancy. January 1995.

U.S. Census Bureau. "U.S.—All industries—by Employment Size of Enterprise." Available from http://www.census.gov/epcd/susb/2003/us/US—.HTM. Retrieved on 2 June 2006.

                                Hillstrom, Northern Lights

                                 updated by Magee, ECDI

Small Business Consortia

Business consortia are alliances of individual business enterprises. Businesses involved in these sorts of consortia are often in the same broad field or industry, though they are rarely in direct competition with one another. Instead, members usually offer products or services that are complementary to those available through other consortium members. Unlike associations and other similar organizations, which engage in efforts to shape legislation and present a unified industry front, business consortia ally themselves for basic business functions, such as marketing. These alliances are not commonplace, but some analysts indicate that in the future, increasing numbers of small business owners may investigate consortiums as a way of sharing common costs, increasing purchasing power, and competing with larger companies.

Business consortia that do form usually come into being for specific reasons, such as competitive threats from a common enemy (whether another business or an unwelcome economic trend), changes in competitive structures, or deregulation. By forming a consortium, the member companies that are involved are usually admitting that for the tie being competitive pressures are so great that the member businesses' ability to survive as completely independent entities is in question.

Participants in business consortia admit that striking such alliances can sometimes curb a firm's ability to act independently, since it's words and actions will reflect on other consortia members. This can be difficult for some entrepreneurs to handle. Moreover, consortia can become crippled if their membership grows too large and unwieldy to make quick decisions, or if individual members fall victim to squabbling or worse as a result of personality conflicts, similar customer bases, or other business disputes. But proponents point out that a business consortium can provide several meaningful advantages to members as well. These include:

Increased clout. Whereas individual small businesses sometimes do not enjoy the same name recognition or respect as do larger companies, the collective bargaining and purchasing power of a consortium as well as the individual marketing efforts of members can provide individual businesses with increased recognition and stature in the community.

Savings of time and money. Joint marketing and advertising efforts save members money because they can pool their resources for better rates; they also save member businesses time because they do not have to undertake as much work themselves.

Expanded customer base. Membership in business consortia can provide participating businesses with increased exposure to new revenue streams.

see also Cooperatives

BIBLIOGRAPHY

Bigbie, John Eric. "Consortia Back in Business." Acquisitions Monthly. April 1994.

Doz, Yves L., and Gary Hamel. Alliance Advantage: The Art of Creating Value Through Partnerships. Harvard Business School Press, 1998.

Smith, Jerd. "Strength in Their Number." Denver Business Journal. 3 March 1995.

U.S. General Accounting Office. Small Business: Workforce Development Consortia Provide Needed Services. Available from www.gao.gov/new.items/d0280.pdf. Retrieved on 13 June 2006.

Vaanderdorpe, Laura. "Capitalizing on Consortia: Cooperation Bolsters Research." R & D. October 1997.

                              Hillstrom, Northern Lights

                                updated by Magee, ECDI

SMALL BUSINESS

A type of enterprise that is independently owned and operated, has few employees, does a small amount of business, and is not predominant in its area of operation.

cross-references

Sole Proprietorship.