How Important are Small Businesses to the U.S. Economy?

Well according to U.S. Dept. of Commerce and a number of other reliable sources, small firms practically sustain the US economy, for example, small businesses:

  • Represent 99.7 percent of all employer firms.
  • Employ half of all private sector employees.
  • Pay 44 percent of total U.S. private payroll.
  • Generated 65 percent of net new jobs over the past 17 years.
  • Create more than half of the nonfarm private GDP.
  • Hire 43 percent of high tech workers ( scientists, engineers, computer programmers, and others).
  • Are 52 percent home-based and 2 percent franchises.
  • Made up 97.5 percent of all identified exporters and produced 31 percent of export value in FY 2008.
  • Produce 13 times more patents per employee than large patenting firms.

And still the small business owner is waiting for credit to ease, especially the business owner wishing to transition and move onto the next stage of their lives. However, according to Federal Reserve Board, Senior Loan Officer Opinion Survey, credit conditions are improving. In mid-2010, commercial banks began to ease the tight lending conditions on small businesses that had begun in early 2007. And credit has continued to flow, as loans under $1 million totalled $695 billion in FY 2009. Also, after declining over the past few years, venture capital investment dollars increased in mid-2010.

Small businesses are heavily reliant on owner investment and bank credit, averaging about $80,000 a year for young firms. Startups rely about equally on owners’ cash injections into the business and bank credit; young firms receive about three-quarters of their funds from banks via loans, credit cards, and lines of credit. One-tenth of startups and about a third of young firms do not use capital injections.

But, how do the established businesses fair?….again the U.S government departments responsible for commerce state that seven out of 10 new employer firms survive at least 2 years, half at least 5 years, a third at least 10 years, and a quarter stay in business 15 years or more. Census data report that 69 percent of new employer establishments born to new firms in 2000 survived at least 2 years, and 51 percent survived 5 or more years. Survival rates were similar across states and major industries. Bureau of Labour Statistics data on establishment age show that 49 percent of establishments survive 5 years or more; 34 percent survive 10 years or more; and 26 percent survive 15 years or more. Which are sobering statistics.

Since 2005, bankcrupticies have gone from 39,201 to a whopping 60,837 in 2009…not an encouraging trend. However, the figures may be distorted somewhat, as three quarters of all U.S. business firms have no payroll. Most are self-employed persons operating unincorporated businesses, and may or may not be the owner’s principal source of income. Because nonemployers account for only about 3.4 percent of business receipts, they are not included in most business statistics, for example, most reports from the Economic Census. However, since 1997, non-employers have grown faster than employer firms. A trend possibly due to the dissatisfaction workers have nowadays with corporations, whether small or large.

Census data show there were 5.7 million firms with employees and 17.6 million without employees in 2002 (and 18.6 million without employees in 2003). Applying the sole proprietorship growth rates to the nonemployer figures and similar Department of Labor growth rates to the employer figures produces the 24.7 million figure. Small firms with fewer than 500 employees represent 99.9 percent of the 24.7 million businesses, as the most recent data show there are 17,000 large businesses.

So, not sure what your answer is, but mine is a resounding yes to the title question…small businesses are the backbone of the country.

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Small Business Owners, are you Planning now for the Economic Uptick?

If you’ve been waiting for the economy to turnaround before selling your business now’s the time to start planning your transition. As bank lending eases and buyer liquidity improves, you’ll want to be ready to tap into the market and take advantage of being the early bird that catches the buyer.

There are already indications that buyers are once again searching for their dream business, along with an increase in business owner’s inquiries wanting sell their businesses. In addition, the SBA has brought their lending rules back into the rational zone, which allows a greater number of potential buyers to take advantage of the eased lending environment.

Another factor important to owners selling their businesses is availability of competent brokers. Unlike selling real estate, where the density of real estate brokers and agents in major population centers is high, the density of qualified and certified business brokers across the nation are few in number. In fact, there are only ten CBI’s (Certified Business Intermediary’s) in New York State alone. Therefore, the supply and demand curve works against business owners delaying a decision to sell, as most of the qualified brokers will soon be pre-occupied once the economy takes off.

Given this state of affairs, the first question a business owner contemplating the sale of their business should ask a broker is, “are you a certified broker by the IBBA (International Business Brokers Association” – the worlds largest professional business brokerage association). A Certified IBBA Business Broker has spent considerable time, effort and investment to ensure they meet the high standards required by their association to professionally serve business sellers and buyers alike. Very much like CPA’s (Certified Professional Accountants), a CBI has to continually sustain his/her certification with continuing education to ensure their clients interests are always catered to in a competent and effective manner.

Don’t take chances, as a long time business owner with so much to lose, why use an unqualified broker to sell your business?…go with an IBBA certified broker and get peace of mind and a successful sale.

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Mission Impossible…Buying a Great Business!

Remember the good old TV series “Mission Impossible”, the team who always got their man, well you can get your man too…or, should I say business. It’s similar to selling your house where location, location, location is the mantra…but in the case of buying a business it’s planning, planning, and planning. Yes, it’s possible to find a pretty good business, but you’re going to expend a lot of sweat, blood and tears in the process. So, before accepting the challenge, have a clear plan of action before embarking on this mission. As with all journeys, you’ll need a comprehensive roadmap. It’s no use waking up one Monday morning and saying to your self, “Oh! I think I’ll try and find my dream business today”. This is a recipe for barrels of frustration and nothing to show for it, except a depleted bank balance.

So, how do you start the ball rolling, so to speak?  Well, first of all you’ll need to know what skills you possess and what type of business would suit you. There’s no point in looking for a business that doesn’t match your skill set, talents and innate capabilities. For example, don’t go looking for a high technology software development business if your background is as a tool and die operator, it just won’t work. If you want to buy a great business you’ll need to reconcile yourself to the fact that this is going to take time, effort and money to pull it off. But the more prepared you are, the easier it’s going to be to weed out the wheat from the chaff. Even if you do find a really great business, it won’t be perfect, as nothing in this world is perfect, so make a resolution now not drive yourself or the seller insane as you undertake all the due diligence activities required.

Next you’ll need to establish a time line and understand the personal financial consequences of your actions and decisions. If you are gainfully employed during your search this will put a strain on you and your immediate family, who after all will be impacted too.  It could take a year or even more to find exactly what you are seeking, so pace yourself and don’t forget to consult close friends, family and especially professionals, such as a financial advisor, legal expert and professional business broker, who are members of the International Business Brokers Association and Certified Business Intermediaries, they will know the small business market and can advise you in your search, but make sure you only work with high integrity brokers who are certified. I have worked with a number of prospective buyers, who in the past have come to me after a series of disasters with non-qualified business brokers, and believe me they wasted considerable time and money. In a number of cases they also lost their earnest deposits. However, if as a potential buyer you have already sold an existing business and have a financial cushion to fall back on, this will allow you a degree of luxury and possibly put you in a better bargaining position in future.

It’s going to take you a couple of months to do the necessary research to put a business search execution plan together, so spend the time wisely to do thorough research.  Don’t forget, this is a job you are probably buying, not just a business. If you do decide to venture outside your comfort zone, you had better make sure you know how to run such a business, which may not be familiar to you. Get all the information you can and even talk with owners of such businesses, if you can do this without compromising your position as a potential buyer, all well and good.  Having a handle on the financial metrics of any potential business you’d like to buy will enable you to develop a sound business plan as part of the process for financing the acquisition. Nowadays, banks will demand a business plan and expect you have a clear vision for the business you are thinking of acquiring. Since the banking crisis, lending rules have now tightened and banks are no longer willing to take anything on faith, especially for SBA type of loans. Also, keep in mind the owner of the business you may be considering buying has a vested interest in helping you flesh out your business plan, but don’t forget it’s your plan not theirs. Make sure the plan accurately reflects the facts of the business.

As part of your planning process, you’ll need to be prepared for questions from professionals, especially from the seller themselves and the seller’s business broker.  The seller will want to know how familiar you are with his type of business and your plans for the future, especially if he or she intends to offer seller financing, as their surety for repayment is tied to your competence and ability to run the business. The seller will likely demand a resume from you as a level of proof to show background knowledge and experience. High on the list will be the owners employees, as most business owners are very protective of their loyal workers. Any hint from you that you might clean house or affect their livelihood in anyway after you have acquired the business, will be grounds for rejection. On the other hand, the seller’s business broker will be more interested in your ability to pay for the business. More often than not, a down payment is required, so the broker will want proof that you have the necessary funds. Many buyers try to weasel word their way out of this question, especially if they are light on funds, but sooner or later the truth will have to come out, so be honest with your answer.

When you have a clear idea of what your needs will be and a comprehensive profile of you as the buyer, your next planning step is determining how you find businesses for sale. There are numerous industry web sites catering specifically to buying or selling a business that can save you considerable time and enable you to home in on those that meet your criteria. Sites, such as Biz Buy Sell at www.bizbuysell.com, Business for Sales at www.businesseforsale.com, and Merger Networks at www.mergernetworks.com, plus a professional association site, such as the New York Association of Business Brokers at www.nyabb.org, are good places to start. They are rich in businesses across a broad range of industries. Once you get on these sites, it is intuitive how to do a search and you will get pretty skilled after a short while.  Make sure you keep a folder of potential businesses, as you will not remember them all as you build your portfolio of the most attractive ones. Organization is the key to being efficient and effective in your search.

Good luck with your search and don’t forget, nothing happens unless you devote the time, apply your creative ideas, and put in the necessary hard work.

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