As I sat in my office pondering the formidable challenges facing small business I gazed out my window here in Minnesota at the frozen landscape. Longing for a prettier picture, I closed my eyes and conjured visions of Florida’s moonlit beaches. Suddenly, the beach seemed to come alive with millions of small shining lights. As I squeezed my eyes shut tighter, I saw that the lights were millions of baby turtles crawling towards the sea.
I didn’t make this up, really. Each summer, April to September, Florida beaches offer a spectacular demonstration of the battle to survive against impossible odds. Millions of sea turtles hatch and embark on an awkward pilgrimage as they travel en masse to the open ocean. Only a small percentage will make it as they are easy prey for a host of predators.
With a first year failure rate of 85%, micro businesses are just as vulnerable as baby sea turtles. Although I knew most (60.8%) small businesses employed less than five people, the vast majority are so small they don’t even show up on the radar. These micro businesses are born, survive briefly, and then die, often without anyone even knowing that they existed.
A recent report funded by the U.S. Small Business Administration and the Office of Advocacy states that Nonemployer firms are essentially businesses without payroll but with annual receipts above $1,000. The report uses special tabulations produced by the U.S. Census Bureau’s Nonemployer Statistics and data from 2002-2004.
The SBA report, titled, “The Nonemployer Start-up Puzzle”, written by Zoltan Acs, Brian Headd, and Hezekiah Agwara and published in December, 2009 differentiates Nonemployer firms—businesses without employees—and Employer firms. Nonemployer firms represent a large percentage of businesses; however, little is known about their dynamics (entry and exit). The report seeks to illustrate basic statistics about the prevalence of entry and exit for Nonemployers and the local conditions that led to their entry.
Nonemployer start-up rates across states and industries seems countercyclical to labor market changes, while employer start-up rates move in line with overall economic cycles. These characteristics of start-up rates indicate that starting a Nonemployer firm is more likely to be an occupational decision based on a tight labor market, while employer firm start-ups are more likely to be responses to economic opportunity. Nonemployer firms that survive and thrive, however, are likely to become Employer firms down the road.
Here are some highlights of the report:
• Nonemployer firms have entry rates about three times those of employer firms. Of the existing companies in 2004, 34.3 percent of Nonemployers were new and 12.6 percent of employers were new.
• Exit rates were lower than but similar to entry rate levels for both Nonemployers and employers.
• Entry and exit rates (collectively referred to as turnover) seem associated with an industry’s economies of scale (essentially, amount of capital needed for entry). Mining, with its high economies of scale, had low turnover rates, while service industries, with low economies of scale, had high turnover rates.
• Employer birth and exit rates had a wider distribution by industry than those of nonemployers. This attribute is most likely because the sizes of employer firms have a wider range than Nonemployers, which by definition are restricted in growth of payroll.
• Florida and Nevada had the highest combined birth and exit rates over the period of analysis, most likely the result of the states’ tendencies toward service-type industries and their growing economies. States with warmer climates in general had higher turnover, with Georgia and Texas in the top five states for turnover. East Coast states leaned toward low turnover, with Pennsylvania and Connecticut in the five states with the lowest turnover.
• Average receipts size for Nonemployer births by industry ranged widely. Educational services had by far the lowest receipts sizes; wholesale trade the highest.
• The econometric model found, after controlling for population growth, that the states’ unemployment rates were positively correlated with Nonemployer entry and were the main driver at the state level.
• The main driver for employer entry was state real GDP; unemployment also had a positive impact.
You don’t have to be psychic to predict that 2010 is going to be a record year for Nonemployer business start-ups. The only question is whether or not these baby micro businesses will survive. Hopefully, these budding little entrepreneurs will stick their heads out from their shells and seek counsel on how to meet the many challenges ahead. To read the entire SBA report, visit the SBA Website.
If you would like to contact me, you can do so by emailing me at mike.clough@bestbizpractices.org or visiting my LinkedIn page.
Posted by: Mike Clough
