When you think of Sarbanes-Oxley, you probably think of Enron or WorldCom. It's only natural.
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James Pethokoukis is a senior writer at U.S. News & World Report. A 1989 graduate of Northwestern University, Pethokoukis has previously worked at Investor's Business Daily and USA Today.
The regulations were meant to clean up financial abuse at public companies. But they affect private firms as well. Many fast-growing private companies have been forced to follow the costly and time-consuming regulations to make their businesses more attractive for an initial public offering or possible buyout.
But a measure of relief may be on the way. The Securities and Exchange Commission's Advisory Committee on Smaller Public Companies, in a report to SEC Chairman Christopher Cox, is recommending that smaller public firms—those with market capitalizations under $800 million or so—be partially exempt from Section 404 of the Sarbanes-Oxley Act.
That's the part requiring costly internal financial control and audit systems—and often the hiring of a compliance officer. Microcap firms—those with market caps under $128 million—could receive a complete exemption. If Cox and Congress agree, small business with an eye on a potential IPO would be under less pressure to become Sarbanes-Oxley compliant.
Lightening the regulatory burden on small business
The U.S. Small Business Administration's Office of Advocacy recently put out a report showing that its annual effort to comply with the Regulatory Flexibility Act saved small business some $6.6 billion in regulatory costs in fiscal year 2005. A key part of the SBA's effort is working with government regulatory agencies early in the rule-making process to discuss the impact of new rules on small business.
It's a major issue. A 2005 study sponsored by the Office of Advocacy showed that the smallest firms bear the largest per-employee burden of federal regulatory compliance costs. Firms with fewer than 20 employees annually spend $7,647 per employee to comply with federal regulations—45 percent more than the $5,282 per employee spent by firms with 500 or more employees. The study also found that the compliance cost per employee for small manufacturers is at least double that for medium-size and large firms. (The annual cost of U.S. federal regulations totaled $1.1 trillion in 2004.)
Given the size of the burden, the SBA's efforts are only a beginning. "This report shows that some positive steps have been made toward lessening the time, money, and effort America's No. 1 job creators spend on regulatory compliance," says Dan Danner, executive vice president of the National Federal of Independent Business. "But Congress, the regulatory community, and small business need to come together to do more." One example of what the NFIB is talking about: Each year, thousands of small-business owners who produce zero lead emissions are forced to file annual paperwork to the Environmental Protection Agency as part of the Toxic Release Inventory reporting program. Earlier this year, the NFIB supported a proposed rule to allow small businesses that produce no emissions to use a less burdensome, short form for their reporting requirements.
Sarbanes-Oxley affects small businesses wanting to go public
It's the dream of some small-business owners to create such a fast-growing firm that someday it will go public. But that's where the Sarbanes-Oxley law comes in.
While the legislation was meant to clean up accounting abuses at public companies, there's evidence that it is affecting private companies. Only 10 companies backed by venture capital raised $540.8 million through initial public offerings in the first quarter of 2006, according to the National Venture Capital Association. That total of funds raised is down 25 percent from the first quarter of 2005.
Conversely, the venture-backed mergers-and-acquisition market continued to perform strongly, with 95 companies being acquired with a disclosed value of $4.8 billion. That was the highest total in five years. Says Mark Heesen, president of the National Venture Capital Association: "We are becoming increasingly concerned about the economic implications of the lackluster IPO market for venture-backed companies. Although we are bolstered by the continued strength of the acquisitions market, we cannot rely on it as the only avenue to produce above-average returns for the venture industry."
One possible explanation: Sarbanes-Oxley compliance costs are so high that some private companies are choosing to be bought out rather than go public and assume that financial burden.
What does the future hold for entrepreneurs? Here's an interesting thought from an E-mail chat I had with entrepreneur and futurist Thomas Frey of the Da Vinci Institute, a business and technology think tank.
U.S. News: What is changing and what do start-up businesses have to watch out for in the future?
Frey: I often talk about what I call the "confluence of influence." This has to do with the do-it-yourself-content movement, where bloggers, podcasters, and others have been given a voice. The single points of influence from the past have changed, and now several million people will have a voice in what's going on. The trick is to find the people who can influence your particular industry and figure out how to get them to say something nice about you.
Because of the millions of voices now speaking at once, there is a lot of noise in the business world, and it takes a lot to rise above the noise. But in addition, the pace of business is speeding up. Someone just turned the metronome on high. Millions of voices mean millions of opinions, and those opinions can either work for you or work against you. And if a large segment of the online world connects with what you're trying to do, that can either be a tremendous blessing or a tremendous curse, but in either case you will have little time to react.
U.S. News: Are we going to see more people dropping out of the corporate world?
Frey: The short answer is yes. Many of them will be seasoned professionals looking for meaning in their lives.
Entrepreneurship is oftentimes a brutal environment to exist in, but it also has many appealing qualities that make it a real magnet for people who find themselves in one of those life-changing situations. Many will choose to do consulting or contract work to bring in money. Others will buy a franchise or start a business that they hope to grow in time. But a rare few are now developing a business I call the "empire of one."
An empire of one business is a one-person business with far-reaching influence. Typically, the business outsources everything—products manufactured in China or India, sent to a distribution center in the United States, with customers in the United Kingdom and Brazil. Manufacturing, marketing, bookkeeping, accounting, legal, and operations are all outsourced to other businesses around the world.
The empire-of-one business model is one with great appeal to former corporate executives with global contacts and good ability to manage things remotely. We will see a sharp increase in these types of businesses starting in 2006.
Illegal immigration a contentious issue for small business
Small-business owners seem to agree on this much: Illegal immigration is a serious problem.
According to a new survey by the National Federation of Independent Business, 70 percent classify it as "very serious" or "serious," and 86 percent say it should have a "very high" or "high" priority for Congress and the Bush administration. But after that, the issue gets a bit murkier.
Asked for the main reason that illegal immigration was a problem, 47 percent cited the cost to taxpayers, while 23 percent said national security and the threat of terrorism. Yet just 10 percent pointed to perceived job losses or depressed wages for Americans, reasons often given by many Americans as the main problems with illegal immigration.
One possible explanation for that discrepancy is that many business owners—in the landscaping and construction industries, for instance—often see illegal immigrants filling jobs that native Americans won't do, at least for the same wages. Many favor looser immigration rules for this reason. At the same time, increasing penalties for employers who knowingly hire illegal aliens was supported by 78 percent of the small-business owners surveyed. In addition, 63 percent oppose amnesty for illegal immigrants if they only need to prove that they have been living in the United States for at least three years.
Small-business owners are split on amnesty—45 percent to 45 percent—if illegal immigrants are employed and not dependent on government services.
Here's a great addendum to a story I cowrote recently on baby boomers becoming late-in-life entrepreneurs. It comes from Jeff Cornwall, director of the Center for Entrepreneurship at Belmont University in Nashville and author of the indispensable Entrepreneurial Mind blog. Cornwall makes two great points about the piece. First, if you're a boomer contemplating turning your lifetime expertise into a consulting firm, Cornwall warns, there is a downside:
A consulting business is tied to the activity of the owner and has no residual value that someone will be able to buy. A business has value to a buyer if it creates ongoing cash flow into the future. If the boomer entrepreneur/consultant retires, the cash flow from his/her consulting activities ends. There seems to be a myth that entrepreneurship and self-employment are secret paths to wealth. If these Entre-Boomers didn't prepare in their working years, they believe that they can start a business when they reach retirement age and it will magically create wealth. It just doesn't work that way.
Second, becoming an entrepreneur requires the sort of "selling skills" that many boomers may lack if they have spent years in the corporate world: [Selling] is a skill that Entre-Boomers seem to lack. Years of corporate life have taken the hustle out of their skill set, which John Challenger, CEO of outplacement firm Challenger, Gray & Christmas, reminds us is key to entrepreneurial success. My experience with working with late-in-life entrepreneurs is an alarming overconfidence. They seem to think, "How hard can it really be to run my own small business?" Trust me, it is a lot harder than most of them realize. And their corporate experience provides little knowledge and experience that help with the day-to-day challenges of running a small business.
Last week's issue of U.S.News & World Report featured a story on baby boomers' opting to forgo retirement in favor of starting a small business. Several of these entrepreneurs made the move as part of an overall lifestyle switch, deciding to pursue their dreams instead of continuing to merely exist as wage slaves. But many boomers may have to make the move out of necessity. A new survey of workers by the Employee Benefit Research Institute found that many of their retirement expectations "are like a piece of Swiss cheese—full of holes. For example, many have accumulated only modest retirement savings, underestimate the share of their preretirement income they are likely to need in retirement, and made no estimate of how much they will need to live comfortably once they retire." Among the findings:
More than two thirds (68 percent) of current workers say they and their spouses have accumulated less than $50,000 in retirement savings.
Nearly 6 in 10 (58 percent) of current workers say they and their spouses do not expect to receive any health insurance from their employers when they retire. EBRI research shows that individuals age 55 who live to age 90 would need to accumulate $210,000 by age 65 to pay for insurance to supplement Medicare and out-of-pocket medical expenses in retirement—far more than all but about 10 percent of workers currently have saved for all retirement expenses.
Nearly 6 in 10 (58 percent) of current workers think they will have fewer than 25 years of retirement, and an additional 19 percent are unable to estimate how long their retirement will last. These findings suggest many workers may not be planning and saving enough to finance the full amount of time they expect to spend in retirement, thereby increasing the odds that they will outlive their retirement savings.
Fourteen percent of current workers said they thought they would need less than 50 percent of their preretirement income to live comfortably in retirement. But 62 percent of current retirees say their income is 70 percent or more of their preretirement income.
Starting their own businesses may be how many would-be retirees close the shortfall.
This week's issue of U.S.News & World Report features an article on "bootstrapping" a small business—launching a start-up with little or no money. And certainly no venture capital. For some further insights into the topic, I chatted via E-mail with entrepreneur and futurist Thomas Frey of the Da Vinci Institute, a business and technology think tank.
U.S. News: Is raising money for a new venture overrated?
Frey: When you launch a start-up business, there are essentially two things you can sell. You can either sell your product or service, or you can sell an investment—an investment in your business. In either case, you have to sell something. And I strongly encourage people to sell their product rather than the investment. Some people are extremely good at selling investments, but invariably the rest of the business suffers and the product or service that the business is being built around oftentimes never gets created. It's far better to bootstrap the business and build it without investor money. Every situation is different, and boot-strapping a business doesn't necessarily mean that no money is involved, but in general the business gets started with very little money, and the primary emphasis goes toward selling the product.
U.S. News: Why do you think this is so important?
Frey: Investor money tends to confuse the issues in a start-up business. Start-up entrepreneurs need to learn how to wrestle with every decision that they make. They need to take ownership of their decisions, and investors often need to "weigh in," sometimes confusing the issues and delaying things. Entrepreneurs often confuse investors with customers. They're not. A business operates off of the people who are making the "buy decision," and the sooner you can get to know the buyers, the better your decision making will be from there on out.
U.S. News: Let's say you have an uncle or good friend who wants to put $50,000 into your business. Should you say no?
Frey: That depends on the situation. It's easy to think that money will solve all of your problems. The reality is that investor money usually creates more complexities and usually more problems than it solves. Most often the money comes in too early, and you don't know enough to spend it wisely. It's better to make your mistakes on a small scale before you blow things up to the next level. However, there are some businesses that simply require upfront expenses that you can't avoid. Sometimes it's tooling costs, or fixtures, or specialized equipment. Oftentimes people will spend tons of money on office furniture. While a nice office can create an image that is absolutely necessary for certain kinds of businesses, it is almost always a bad way to spend your start-up money, which you will soon be in very short supply of.
U.S. News: What if you run out of money?
Frey: Usually I tell people to get used to it because as an entrepreneur, it will happen a lot. There are virtually no businesses that haven't gone through the money struggles. Quite often the less resilient entrepreneurs will hit the kill switch at the first sign of problems. Business owners need to earn the right to be where they are, and working their way through a myriad of problems they face every day gives them the stripes to say they earned it. Money is just one of the many problems.
U.S. News: Can you give me some examples of good bootstrapping techniques?
Frey: Bootstrappers are looking for unusual arrangements—trading, barter, delayed payment, volunteer help, and tons of things for free. They're not afraid to ask for ridiculously one-sided deals because if you don't ask, you'll never know how far you can push it. A bootstrapper will tackle a problem from a hundred different angles looking for ways to create a wedge into a problem and begin prying the problem apart. Good bootstrappers are relentless and tenacious, never letting a good problem get the best of them. They actually look forward to the next problem to tackle.
U.S. News: Could you give an example?
Frey: A small business gets started, and they put everything they have into getting a contract with Wal-Mart. They create marketing material, spend countless hours on the phone and in conversations to land the big Wal-Mart deal. And when Wal-Mart says no, the business owner feels crushed and wants to throw in the towel. But usually they don't get a no answer; they just don't hear anything, and they wait and wait and wait. People need to avoid the single point of failure and constantly keep moving. There are thousands of possible distribution channels, and Wal-Mart, in most cases, should be at the bottom of your priority list because they typically want you to be a well-established business before they order from you. And too large of an order, too soon, can kill a business.
The National Association of Manufacturers recently put out a study of small and midsize companies. It's full of eye-opening stats and useful advice. For instance, the report outlines some of the leading best practices of top manufacturers. Among them:
Stay in touch with customers, talk with them about their needs, and look to them for new product ideas.
Look for a long-term relationship with a banker who is willing to take the time and effort to understand your company.
Invest at least 3 percent of your payroll in employee training; get involved with workforce investment boards, government-sponsored training programs, and local educational institutions such as community colleges that offer training in manufacturing skills.
Appoint a majority of outsiders with relevant and diversified business experience to your board of directors or board of advisers; look to those outside directors or advisers for opinions and advice; welcome their challenge.
Develop a plan for management succession. Start estate planning early, and keep abreast of estate tax laws and regulations.
Constantly look for opportunities to delegate, to empower your employees at all levels, and to create the corporate culture for a high-performance workplace.
In this week's U.S. News & World Report, I write about budget cuts at the Small Business Administration. I recently chatted about the SBA via E-mail with Jeff Cornwall, director of the Center for Entrepreneurship at Belmont University in Nashville and author of the popular blog, The Entrepreneurial Mind.
USNews: What is the current state of small business and could you put that into an historical context?
Cornwall: The last great period when entrepreneurs transformed the American economy was in the late 1800s. In fact, most of the 1997 Fortune 200 were already among the largest corporations by 1917. These businesses helped to shape the American economy, society and culture for the next century. The 1970s was the beginning of the end of this economic era. The large corporations formed in the last great entrepreneurial era in America were no longer creating new jobs in significant numbers. Total employment by the Fortune 500 companies has dropped from 20 percent of the U.S. workforce in 1980, to about 7 percent in the late 1990s. Over the past decade or so, the emergence of a new entrepreneurial economy in America has begun. There has been significant growth in entrepreneurial start-ups and small businesses now are the engine of this economy. New business formation has grown from about 200,000 per year in mid 1900s to over 3.5 million per year in the early21st century.
USNews: How much does the Small Business Administration matter to American entrepreneurs?
Cornwall: The SBA matters if it can have an impact on what really matters for small businesses in the 21st century. We know from studies conducted around the world that there are three factors that have the most impact on new business formation. 1) Reducing regulation on small business. The SBA Office of Advocacy has been at the forefront of efforts to cut needless government red tape that inhibits small business formation and growth; 2) Reducing and simplifying taxation; 3) Education of nascent entrepreneurs. Some studies suggest that the success rates of small businesses can as much as double when the entrepreneur has received education on key entrepreneurial and small business skills. To the extent that the SBA can provide education to entrepreneurs who can find this knowledge nowhere else, it matters.
USNews: There have been budgets cuts at the SBA. If the SBA disappeared tomorrow, would that negatively impact small business?
Cornwall: It would have an impact to the extent that small business owners would lose an important source of knowledge and information. Also, SBA loans have proven to be important in stimulating the formation and growth of small business ... [And] although loans are important, almost 80 percent of initial funding for small business comes from the entrepreneurs, and from their friends and family.
The first of the baby boom generation is hitting 60 this year, but many probably aren't thinking much about retirement. Oh, they may indeed be pondering leaving their current jobs. That doesn't mean, though, that they're ready to hit the couch–it's just time to start a new chapter in their working life.
A 2005 study by Merrill Lynch found that 76 percent intend to keep working and earning in "retirement." And unlike many younger entrepreneurs who have to tap credit cards or friends and family for funds, the "graying entrepreneurs" often have lots of ready cash, having been given severance packages or buyouts from their old gigs. "Such packages can be repositioned toward new business costs or give them much larger borrowing power at the bank, where they are more likely to be seen as good credit risks with collateral to back up a small business," explains small-business consultant Anita Campbell [www.smallbiztrends.com].
Given all the anxiety out there about outsourcing, offshoring, and employment instability—just check out recent news about the Big Three automakers or the mega-media companies—the idea of working for a large company may not have the lure it once did. And that's good news for small-business owners who may now have access to the sort of management talent that was unavailable in the past. As a recent analysis by the Herman Group put it:
Smaller employers are also forced into layoff situations from time to time, often caused by sudden drops in business from large company customers. They tend to avoid laying off people, however; each team member is more important to the smaller employer. That attitude, and the opportunity to play a more significant role, appeals to people who want to be involved, who seek meaningful work, who want to make a difference. Mix in today's emerging values centered on life-work balance, personal engagement with work, and being able to choose where you work, and smaller employers become very attractive. Result: Those companies will be able to employ high-caliber talent that was not as available in the past. Superstars who sought glamorous jobs in major corporations will show a preference for smaller companies instead. Managing them will be almost overwhelming—like having wild stallions pulling a wagon designed for farm-bred horses. Expect smaller employers to retain search firms and other outside consultants to help select and manage strong new employees coming out of an eager talent pool.
It's no surprise to anyone running a small business that happier employees means less turnover, less absenteeism, and high productivity. One way to make your workers happier, of course, is to hike their pay.
But that is not the only way—or the cheapest. A new study on job satisfaction among Canadian workers found that small increases in job satisfaction create as much happiness as large rises in income. The study found, for instance, that if job satisfaction for a particular job were reduced from 9 to 8 on a 10-point scale, income would have to be increased by more than 50 percent to compensate.
What are the most important nonfinancial factors in worker happiness? Often it's an employee's ability to control the job. In short, let the worker make more of the decisions. Other factors: having enough time to do the job, and—most important—having trustworthy bosses.
What trends will transform business over the next decade or two? That's good information to have whether you're an entrepreneur, a small-business owner, or a megaconglomerate manager. Looking into the crystal ball is always dodgy, but consulting firm McKinsey & Co. has taken a stab at it in the latest issue of the firm's quarterly journal. Here are several of its forecasts:
Structure. In many industries, a barbell-like structure is appearing: a few giants on top, a narrow middle, and then a flurry of smaller, fast-moving players on the bottom. This structure will provide new opportunities for small business.
Asia. Although the United States will still have the largest share of absolute economic growth, Asia (excluding Japan) will account for the same level of global gross domestic product as western Europe. Today, Asia accounts for 13 percent vs. Europe's 30 percent.
Aging. The aging of populations will increase demand for social services, requiring either greater worker productivity or higher taxes. Some private-public policy hybrid is likely in order to provide healthcare and retirement security.
Consumers. Nearly a billion new consumers will enter the global marketplace in the next decade as consumer spending power in emerging economies will more than double to $9 trillion. That's about where western Europe is today.
Resources. Expect higher prices ahead unless technology and innovation result in more-efficient use of resources. Oil demand is projected to grow by 50 percent in the next two decades, and supply is unlikely to keep up with new approaches.
Management. Running a business will turn from an art to a science. More and more executives will adopt algorithmic decision-making techniques and use highly sophisticated software to run their organizations. Forget about getting a competitive edge—these tools will be necessary merely to play the game.
Sarbanes-Oxley regulations were meant to stem financial abuse at public companies. But they're having an impact on private firms as well. A new survey of CEOs of fast-growing private companies found that more than 1 in 4—27 percent—is borrowing "best practices" from the Sarbanes-Oxley compliance regimes of public companies.
Why would they attempt to follow the costly and time-consuming regulations? One reason is to make their businesses more attractive for an initial public offering or as an acquisition candidate. "What we are looking at is an ounce of prevention to prepare for those events," says Pete Collins, survey director at consulting firm PriceWaterhouseCoopers, which conducted the survey. Still, most CEOs—73 percent—would not want these regulations to be mandatory.
Some other results:
38 percent of surveyed CEOs believe that private companies enjoy a competitive advantage over publicly traded companies because they're not required to comply with the same level of regulations.
64 percent report that regulatory concerns could potentially derail any plans to merge with public companies or become subsidiaries of one.
67 percent of those considering eventually going public say the cost of compliance with Sarbanes-Oxley and other SEC-imposed restrictions is a potential barrier.
What fibs do entrepreneurs tell their potential venture-capital financiers? That's the topic of a recent blog post written by Guy Kawasaki, managing director of VC firm Garage Technology Ventures and former chief evangelist at Apple Computer. (Yesterday, I posted the fibs VC guys tell entrepreneurs.) Here are a few of the falsehoods he's observed:
"Our projections are conservative." Entrepreneurs tend to be pretty optimistic. Kawasaki's rule of thumb when analyzing sales projections, "I add one year to delivery time and multiply by 0.1."
"(Big-name research firm) says our market will be $50 billion in 2010." This statement always pops up in PowerPoint presentations, whether the product, Kawasaki says, "is bar mitzvah planning software or 802.11-chip sets." VC investors are pretty skeptical of this sort of thing. The flipside of this lie is the classic assertion, "All we have to do is get 1 percent of the market." But Kawasaki points out that this sort of statement tends to underestimate the difficulty of getting 1 percent of any market. Plus, "no venture capitalist is interested in a company that is looking to get 1 percent or so of a market. Frankly, we want our companies to face the wrath of the antitrust division of the Department of Justice."
"No one can do what we're doing." Of course, this statement does not anticipate the future influx of copycats or competitors. Kawasaki provides the sports analogy of running the first four-minute mile. No one in history had done it before Roger Bannister. But someone else did it a month later. "The world is a big place," Kawasaki says. "There are lots of smart people in it. Entrepreneurs are kidding themselves if they think they have any kind of monopoly on knowledge."
Guy Kawasaki is a managing director of venture-capital firm Garage Technology Ventures and former chief evangelist at Apple Computer during the rise of the Macintosh. On his fascinating blog, Let the Good Times Roll, he writes about the "lies" that venture capitalists tell entrepreneurs. Here are a few of them:
"I liked your company, but my partners didn't." Kawaski says that's just a good cop/bad cop routine when one of the VC guys doesn't want to be blamed as the entrepreneur's dream killer. "This is a cop out; it's not the other partners didn't like the deal as much as the sponsor wasn't a true believer. A true believer would get it done.
"We're investing in your team." Kawasaki says this is merely a reassuring statement to entrepreneurs that they won't lose control of their companies. But don't count on it. What that statement really means, according to Kawasaki, is that "we're investing in your team as long as things are going well, but if they go bad we will fire your a– because no one is indispensable."
"I have lots of bandwidth to dedicate to your company." In other words, the venture capitalist has lots of time to devote to your firm. But that's a bad assumption, Kawasaki says. "Counting board meetings, an entrepreneur should assume that a venture capitalist will spend between five to 10 hours a month on a company. That's it. Deal with it. And make board meetings short!"
There's a famous investing maxim: Buy what you know. People thinking about starting a small business often put their own twist on that advice: Sell what you know. Why do you think opening a restaurant is such a popular choice for first-time business owners? Pretty much all of us think we are knowledgeable about food. Another popular choice is animal lovers starting a pet-related business. And doing so might not be such a bad idea, according to Laura Bennett, CEO of Embrace Pet Insurance. She recently blogged about the top pet-related business trends for 2006 at the popular Small Business Trends blog. Some of her insights:
Growth in unique pet goods. Much of the growth in pet spending in 2006 will come from newer pet items such as pet deli snacks, toys, luxury items, and convenience accessories like programmable feeding and watering stations, warming mats, and self-cleaning litter boxes. High-end specialty pet stores will thrive.
Growth in pet services such as grooming, boarding, pet photography, dog walking, and pet sitting. More pet owners will pay for these services as it is becoming socially unacceptable in some areas to leave your dog alone during the day or your cat alone for the weekend.
Steady increase in pet insurance. The estimated 2005 market size is approximately $160 million, and it is projected to grow by 25 percent to $200 million in 2006. More and more employers will offer pet insurance as a voluntary benefit, and some of the larger pet insurance companies will start mass media advertising, increasing overall consumer awareness.
Increasing online sophistication from new pet-related businesses. Traditionally, pet lovers have set up small-business sites with little thought about design, target audience, and content. Newer players, such as Urbanhound and WagginTails, are beginning to be more sophisticated in design and E-commerce, reaching their target audience via website usability, search-engine optimization, paid search, and word of mouth.
James Archer runs a one-year-old interactive marketing firm, Forty Media, in Phoenix and writes one of the better small-business blogs around. In a recent post to Strange Brand, he tells readers what he has learned about running a small business during the past year. A few of his insights:
Don't be afraid to spend money. "You can't just wait until you have enough money to hire another person, because by then you've probably wasted some great potential. If the time is right, you begin hiring, and let the additional income permitted from the company's growth pay their salaries. Growth takes work. It's not just a side effect of success."
Too much customer service can be a bad thing. "I want our clients to adore us. That's a good customer service philosophy. We believe in it so much that we've taken significant losses on some projects, just to ensure that the client isn't displeased. However, our obsession with good customer service has in many ways prevented us from achieving great customer service . . . . So, in one of the hardest business decisions I've ever made, I contacted several of our clients and let them know that we wouldn't be able to serve them anymore . . . . Each of the conversations was painful . . . but they all needed to be done, both for their benefit―because we were overwhelmed and couldn't properly serve them―and for our own."
Long hours are not a badge of honor. "It's easy to associate a huge workload with the idea that 'business is booming,' but in reality, it's usually a sign of some (or all) of the following: You're disorganized. You're estimating inaccurately. You're not managing your staff effectively. You're giving 'nice' deadlines to clients, instead of taking the time to explain and justify more realistic deadlines. A well-managed project should fit very nicely into 40-hour weeks, and that's the baseline that we're shooting for. It may take us a while to get there, but we certainly will."
Small-business consultant Anita Campbell of the Small Business Trends website recently released the results of an online survey of vendors to the little guys. (The survey is only available online until December 18.) Here are some of the findings and Campbell's analysis:
Just 33 percent of vendors pursue home-based businesses or sole proprietors. Analysis: "There may be a missed opportunity here . . . smallest of businesses appear to be underserved."
More than half of vendors pursue big-ticket sales of over $2,500. Analysis: "This response may indicate an opportunity to carve up existing offerings into smaller [and thus small-priced] components."
Most vendors—83 percent—find small business customers offline through referrals. Another 52 percent find them through networking events. Analysis: "It pays to develop relationships with small business owners and staff and maintain good relations with existing customers to maximize referrals."
One-third of sellers say finding enough small business prospects is their top challenge. Analysis: "B-to-B sellers should make sure they can be found readily on the Web. With increasing frequency, customers seek out vendors, rather than the other way around."
Women CEOs motivated by personal achievement, people
Why do women start small businesses? One commonly cited reason is their inability to crack the so-called glass ceiling. So in response, women go out and start their own businesses. But a new study by Babson College and the Commonwealth Institute of 215 women-owned businesses in Massachusetts sheds some new light on that and other assumptions. Among the findings:
Debunking the stereotype that women start businesses solely out of economic necessity, more than 54 percent stated that economic necessity was barely a motivator or none at all. And while nearly 32 percent cited the glass ceiling as a motivator, 48 percent said it was minimally a motivator or none at all. Women CEOs say they are motivated by personal achievement (85 percent) and a desire for challenge (80 percent).
The women CEOs cited customer satisfaction as the leading factor in doing business (97 percent), followed by employee satisfaction (92 percent), company culture (81 percent) and work/life balance (67 percent). These areas were ranked higher as daily business priorities than rapid sales growth, high profitability, personal financial reward and high market share.
Women CEOs try to balance work and family as 78 percent of those surveyed are currently married or with partners and 87 percent have children. "I think the interesting thing to me is that these CEOs were focusing on people, whereas the traditional business wisdom is to focus on the bottom line first," says Nan Langowitz, director of the Center for Women's Leadership at Babson College and an associate professor of management, in a chat with U.S.News & World Report. "This is really the Peter Drucker school, where what counts first are customers and employees."
Want to create some buzz about your small business and the product or service it sells with a word-of-mouth campaign? Here are some more tips from the Word of Mouth Marketing Association, drawn from a recent report coauthored by research firm eMarketer:
Be authentic. Refrain from carefully crafting ad copy that will be immediately identified as such and ignored. Think of how you would talk to a friend or family. And be honest. Are there weaknesses with your product? Be upfront about it, or you might create mistrust and potentially damage your brand.
Identity the "influentials." These are key people whose views help determine what others think, in wide circles. They can efficiently spread your word to huge numbers of interested parties. In Emanuel Rosen's book The Anatomy of Buzz, he recommends finding influentials and arming them with relevant information about your product or service. Search blogs and message boards for people who are talking about your goods.
Make it easy to spread the word. Do whatever you can to facilitate the diffusion of your message. E-mail is one of the simplest ways to achieve this, but there are other tactics as well. You can include "Forward to a Friend" buttons on your website, create entertaining podcasts to encourage send-along activity, or provide funny IM or text messages that can be instantly relayed by others using a cellphone.
Tie your word-of-mouth campaign to the rest of your marketing campaign. Doritos employed an interactive and "viral" campaign (one that creates, as the WOMMA puts it, "messages designed to be passed along in an exponential fashion," through electronic means or by E-mail) using a mix of outdoor billboards, cellphones, and a website. For the campaign, outdoor billboards contained a mysterious message that could be deciphered only by typing a special code number into a cellphone. Those texting in with their cellphones were, in turn, directed to the Doritos website, where people could read and post to blogs, socialize with others, win prizes, and receive free IM buddy icons. An entire community was created using multiple content platforms.
Turning your customers into "evangelists" for your product or service is the focus of "Spreading the Word" in this week's issue of U.S.News & World Report. It's a business philosophy dependent on the power of word-of-mouth advertising and marketing. Does WOMA really work? Here are the results of some studies just compiled by the Word of Mouth Marketing Association:
40 percent of marketing executives in 2005 plan to use word of mouth during the next six months. (Only E-mail marketing scored higher.)
26 percent of holiday shoppers in 2004 bought online gifts because of a friend's recommendation. TV or website ads scored 15 and 14 percent, respectively.
76 percent of United Kingdom consumers in 2004 said a friend's recommendation made them feel most comfortable about a product and service vs. 15 percent who said advertising.
Recommendations from friends rank right after convenience and customer service for consumers choosing financial or travel services.
71 percent of consumers, 86 percent of manufacturers, and 93 percent of salespeople in 2003 thought word of mouth was the most important promotion factor affecting car purchases.
In this week's issue of U.S.News & World Report, I have a story about "customer evangelism," how small businesses and big businesses are trying to turn passionate customers–particularly those on the Web–into a volunteer sales force that will spread the good news about their products or services. During the course of my reporting, I had a chance to chat with Ben McConnell and Jackie Huba, authors of Creating Customer Evangelists. They also write the popular Church of the Customer Blog.
Here are some excerpts from our conversation at their Chicago home:
U.S. News: What is driving companies to embrace customer evangelism? Huba: There are lots of studies showing that the effectiveness of advertising in being able to reach customers is plummeting. Companies know they have to find another way to get their message across, so they are moving from message management to an open-source collaborative messaging environment where there is a back-and-forth, two-way conversation . . . Customers have always had passion about certain brands or products, but they really haven't had a way to show that passion. But now with the Internet, people can create their own marketing for the company and show that passion.
U.S. News: Give me an example. Huba: There's the George Masters iPod ad. A schoolteacher created this ad for the Apple iPod, spent months creating it. But he loved Apple so much, and to show off his design skills, he created an ad that went around the world. This is a customer evangelist.
U.S. News: You stress the importance of a company being authentic and not trying to spin its customers. What does any of this matter if a company makes a good product? Huba: It costs five times more to acquire a customer than to keep a customer, so a lot of people are focused on loyalty and retention. The fact that someone is satisfied with a product is great, but I could switch when something new comes along. So if you go up the loyalty ladder, you will find people who are so loyal that they will recommend the product, so loyal that they will only use that product, so loyal that they will pay more. And at the highest level of the ladder is when there is such a relationship with the company it is like they have some ownership in the company. And that is the pinnacle of where companies need to go.
U.S. News: It seems like big companies have a problem being open and transparent. McConnell: I think any company can do this regardless of size, but it takes the right philosophy, theology, and belief system in order to make it successful . . . It's been a dramatic turnaround for Microsoft, going from a very closed, secretive culture to a very transparent culture, and that is the whole idea behind their 12 hundred, 13 hundred blogs . . . Apple, though, is still a mysterious, secretive company. They may be one of the only companies that can get away with not revealing its secrets. It is very opaque, and that is part of their juice. But once Steve Jobs goes away, retires, or dies, I don't think Apple will be able to sustain it.
U.S. News: Still, having conversations and dialogue will require a huge shift in corporate culture for many firms. Huba: The No. 1 concern that we hear from companies is that people will say negative things about them. But wouldn't you rather be in that conversation than watching it from afar, in fear?
U.S. News: Tell me about another company embracing evangelism. Huba: There is a really good story in our book about O'Reilly Publishing, a technical book publisher. What they did a few years ago was go out and find these folks who loved their books and were evangelizing about them on their blogs. And a woman in their PR department named Simone Paddock started a program called the O'Reilly Evangelist Program, and she contacted them and said, "Thank you so much for telling readers about our books. We would like to invite you into our program, and we want you to help design our program. What do you need?" And the bloggers said they wanted galley copies of the books, early copies, and they wanted to be able to go to the O'Reilly conferences so they could report on them. So Simone designed the evangelism program based on that and even had a special newsletter for them so they were always informed.
With unemployment low, big companies may have to go the extra mile in coming months by offering aggressive benefits to workers. And that may be a boon to small businesses that run errands, offer personal services, and handle other types of "concierge" duties, say Roger Herman and Joyce Gioia, consultants and authors of Herman Trend Alerts. Some insights from a recent analysis of theirs:
We have already seen the return of concierge services. This benefit will be offered by large companies. National and local providers will sell concierge services to smaller companies as well, challenging concierge firms to be more creative, stronger in their outreach, and more responsive to needs and opportunities of valued employees. This field will soon become even more competitive, including numerous home-based businesses.
What sorts of services might small businesses be able to supply? Mobile car washes, massage therapy, hair cutting, and financial planning are just a few. One other benefit employers might begin to offer: paying off debt for new employees. From Herman and Gioia:
Employers hiring college graduates realize that these employees often arrive carrying a heavy load of student loan debt. Some sort of support to help reduce that debt is a most welcome benefit. . . . Under current law, a federal agency can repay as much as $10,000 of an employee's debt annually, not to exceed $60,000 for any one employee.
It's a pretty good time to be running a small business. Unless it isn't. Which is correct? Well, if you listen to the Democrats on the House Committee on Small Business, things are pretty bad. The third-quarter update to their Small Business Index—released last week—reached an eight-year low of 69.99, down 2 points from June.
In a statement, the group blamed the drop on "several factors, including rising energy and healthcare costs, skyrocketing interest rates, and reduced business confidence, as playing a major role in the decline—and that Hurricane Katrina has impacted not only the Gulf Coast region's economy but also small businesses nationwide." By contrast, the most recent analysis of small-business attitudes from the National Federation of Independent Business found optimism climbing and concluded that the "recent hurricanes had little effect on the nation's overall economy." More business owners were planning on hiring in the fourth quarter, according to the NFIB survey, and more were forecasting a better economy.
To break the tie, I asked Mark Vitner, senior economist at Wachovia, to rate the current economic condition for small business. His take on the situation: "It's not great, but it is good, which is where it is most of the time. Interest rates are near historic lows—which is very important to small business—and the economy has grown in excess of 3½ percent each of the past eight quarters. It is unfathomable that small business would find this the worst environment in eight years."
Is a sales call pointless? That's the obvious contention of Marc Miller, coauthor of the book Selling Is Dead. Miller, who is head of a sales and marketing consultancy called Sogistics, says sales techniques need to change in the Internet age. For a small business, merely visiting and pitching your wares to a potential customer isn't enough, especially since anyone can find out about your products or services on the Web. Instead, salespeople must help customers become more productive and innovative and show how their goods might play a role in that. "Salespeople have to find new types of problems they've never before solved, and they have to help their customers attain objectives that may only loosely be part of their traditional value propositions," Miller writes me in an E-mail. A couple of examples of how to do that:
A small distributor brings a group of people from several companies it already works with to meet with execs from the distributor's major customers. The purpose: to brainstorm on ways to use technology to increase their businesses.
A midsize commercial printer coordinates full-day events with major customers during which the printer brings in marketing specialists from other firms to work with their executives.
As Miller explains: "Salespeople will have to be like movie producers. Just as a movie producer pulls together all of the unique casts and crews for each movie, salespeople pull together select groups of alliance partners who possess the necessary intellectual capital for each client situation . . . The end result is that customers will think you're remarkable, and they will pass the story along to others." Is Selling Is Dead worth a look? Business guru Seth Godin thinks so. On his popular blog, Godin writes, "There are very few books that actually think about what it means to sell something. Marc Miller delivers one."
In this week's issue of U.S.News & World Report , I write about how small businesses can deal with attempts by local governments to exercise powers of eminent domain, which have been enhanced by a recent Supreme Court's decision. Truth is, when governments try to seize private property, business owners don't have many options other than to sue the city or squeal to the media and raise public awareness. But those options can be effective. Late last month, a San Diego jury awarded $7.7 million to cigar-store owner Ahmed Mesdaq, who was forced to move after the city used its eminent domain powers to take his property. Although the city offered Mesdaq $3 million before the trial, the jury found that the offer took into account only the value of the property–not the value of the business due to its location and reputation.
Then there's the story of Sean Wieting, who successfully fought an attempt to condemn his restaurant in Lincoln, Neb. He says energizing the public is key. "It would have cost me $120,000 to move, so I went on TV and handed out fliers to every single customer who came into my restaurant," says Wieting. It also didn't hurt that he was a former University of Nebraska football player in the Cornhusker-crazy state.
The U.S. News article highlights the story of Scott Mahan, who owns an office supply store in Ardmore, Pa. After the local township initially tried in 2004 to use eminent domain to take over a group of downtown properties–including his own–Mahan helped organize a group called Save Ardmore. The group adopted a two-pronged strategy:
Sue the township.
Get the public on its side and use that awareness as a cudgel to change the political makeup of the board of commissioners.
So far the group is batting .500. During local elections earlier this month, five new members were elected to the Lower Merion Township Board of Commissioners, including three who signed an anti-eminent domain pledge. As Mahan stated in an E-mail to me: "We are encouraged that they will now listen to what the people want, which is local government that will protect their rights."
The group has had less success on the legal front. Last week, a U.S. district judge dismissed the coalition's lawsuit on the grounds it was premature because the township had yet to finalize its redevelopment plan. But Mahan and other local business owners are hoping the political changes will make more legal action unnecessary.
Consumer confidence may be shaky these days, but small-business owners continue to be upbeat. The National Federation of Independent Business's small-business optimism index jumped nearly 4 points last month to 103.7.
"The economy is staying very strong," says NFIB Chief Economist William Dunkelberg. "And I wasn't really expecting any real impact to the macroeconomy due to the hurricanes, other than the energy price spike. But now prices are falling. Small businesses may not like [higher gas prices], but they don't seem to be a big deal to them as long as customers keep coming through the front door."
The index showed big increases in those surveyed who expect strong sales and better earnings. Also, more firms plan to create jobs now than at any other time since the dot-com boom. In fact, many business owners complain of being unable to find enough qualified workers. What, if anything, does Dunkelberg worry about? A big slowdown in the housing market, he says. If home prices stop surging, consumers may begin to save more and spend less. Though eventually those savings will translate into more capital available for business, the process "isn't instantaneous," Dunkelberg says. More on the NFIB report is available at www.nfib.com.
What kind of plans do you have for your small business? Satisfied with a home-based operation run out of your den? Or do you envision a much larger outfit? Compared with counterparts around the world, U.S. entrepreneurs are much more likely to think big.
Some 14 percent of American new business owners expect to employ at least 20 workers within five years, according to a survey of 35,000 business owners in 44 countries conducted by the Global Entrepreneurship Monitor consortium. [The full survey is at www.gemconsortium.org] That compares with 10 percent for the survey group as a whole. In addition, a survey of 400,000 people who don't own businesses found that Americans are more likely than other nationalities to consider starting a small business that would employ more than 20 workers in five years. According to the survey, about 1.6 percent of Americans fall into that category vs. 0.7 percent for adults in the United Kingdom and Germany—the two second-place finishers.
Another recent study looked at countries providing the best access to capital for people looking to start a business. Right now the United Kingdom is on top for the first time, according to the Milken Institute's capital access index. Hong Kong, No. 1 a year ago, slid to second this year, followed by Singapore and the United States. Last year, the United States came in sixth. The index ranks nations on more than 50 measures, from the strength of their banking systems to diversity and efficiency of financial markets to general economic conditions. The top-10 countries (with 2004 rankings):
How much is your small business worth? Or more important, what do other people—like potential buyers—think it's worth? Jeff Cornwall, director of the Center for Entrepreneurship at Belmont University in Nashville, Tenn., has a great post on his blog, The Entrepreneurial Mind about the valuation process. He says the only reason that reputation, employees, or customer base has any value to a prospective buyer is that they all can contribute to cash flow for the new owner. To determine cash flow, the metric that matters is EBITDA (Earnings Before Interest Taxes Depreciation and Amortization):
"That is the best measure of cash profits of a going concern for most businesses. Using EBITDA makes comparing businesses possible as it controls for financing, corporate form, and accounting practices related to assets which all can vary. So what does a buyer look do with EBITDA? In the simplest sense they use a multiple of EBITDA to give the business a value. The higher the multiple, the stronger they expect earnings to be going into the future. In most cases, the multiple they use on EBITDA ranges from 3 to 8. Now that is a huge swing in possible values. A company with EBITDA of $1 million could be worth anywhere between $3 million and $8 million!"
So which multiple is applicable to your business? There are a lot of different factors that go into the calculation, such as your market position, customer base, and the type of business you're in.
Want a quick glance at how your small-business website ranks in the world of Web searches? Well, there's an interesting new tool (thanks to a pointer from Lee Odden of TopRank Online Marketing and the Search Engine Smarts blog developed by a search engine optimization, or SEO, company called We Build Pages.
It's called, appropriately enough, Cool SEO Tool, and it allows business owners to enter their website's URL—along with a keyword or phrase—to quickly see: (1) if the site ranks in Google's first 100 results for that keyword search; and (2) what the top results are for that keyword search. There are also additional stats for the more sophisticated SEO do-it-yourselfer.
Still doing your books 1970s style? You know—paper, pen, and a calculator or adding machine? If so, you are not alone.
More than half of all small businesses still do not use any accounting software, according to a survey of small businesses—those with under 100 employees—by Access Markets International in New York. But pressure to electronically exchange info with larger customers and the need to comply with Sarbanes-Oxley and other regulatory requirements will most likely force more and more companies to head to Best Buy or Circuit City and get a copy of accounting software from Intuit (QuickBooks) or Microsoft (Small Business Accounting).
If you are just getting started, AMI recommends Intuit's $99 Simple Start software, which allows easy upgrades to more sophisticated—and expensive—packages as your business grows. Yet the report also suggests that customers who already use Microsoft's Excel software might feel comfortable trying Microsoft's accounting software, since it promises to "require minimal training to get up to speed." If you already use QuickBooks, you can also port in data to Microsoft's offering.
In this week's issue of U.S.News & World Report, I have a story that gives a few tips on how to optimize your small-business website so that it's more likely to score higher in search-engine page results. Here are a few more tips from search engine optimization expert Jill Whalen of High Rankings:
How often do keywords or phrases need to be repeated on a page to get better search results? Do a certain percentage of words on a page need to be keywords or phrases?
Whalen: There is no set number. You need to use them however many times it makes sense for your particular page, product/service, and target audience.
If you are selling multiple products, should each have its own webpage?
Whalen: Generally, it makes sense for separate products or services to have their own page or it starts to get confusing for the site visitor. If a site visitor is confused, you can pretty much assume that a search engine would also be.
Can you give some examples of websites that do a good job at optimization, both in their use of keywords and in creating separate pages for different products?
Whalen: Well, almost any E-commerce site has separate product pages. Service-type sites generally have separate service pages as well. For instance, look at Geico.com. They do a good job of separating out their various insurance products while also ensuring that they use the words real people might be using to seek out their products. For a smaller-type business, a site such as www.interactiveartschool.com does a nice job of showcasing their various offerings, while keeping a nice balance of copy for their visitors as well as the search engines.
The nation's booming Hispanic population seems like a ripe market for many businesses. But it would probably be a mistake to lump all Hispanic consumers together. A recent study by Scarborough Research identified five key market segments. Here are some excerpts:
New Lifers are foreign-born Hispanics who have lived in the United States an average of eight years. Of this group, 61 percent prefer to speak Spanish mostly or exclusively. They have an average annual household income of about $40,000. These consumers are more likely than other Hispanics to have had a child or been married over the past year.
Old Ways are also foreign-born Hispanics, but they have been living here a lot longer, about half their lives. They have a mean age of 54, and 61 percent prefer to speak Spanish mostly or exclusively. Old Ways Hispanics have an annual household income around $47,000. Sixty percent of this group resides in New York, Los Angeles, or Miami.
Settled In are U.S.-born Hispanics who have spent the majority of their lives here. They have a mean age of 43 and an annual household income of $68,000. Just 19 percent of these consumers prefer to speak Spanish mostly or exclusively. They are 69 percent more likely than other Hispanics to have an annual household income of $100,000 or higher, are 31 percent more likely to have gone online during the past month, and are high-mileage drivers.
The Pioneers are exclusively born in the United States, have a mean age of 65, and have an annual household income of $50,000. Twenty-one percent of this group prefers to speak Spanish mostly or only. These consumers have above-average cable use, and 47 percent of them reside in New York, Los Angeles, San Antonio, or Albuquerque, N.M.
Young Americans, three quarters of whom are U.S. born, have an average age of 26 and an annual household income of $60,000. Seventeen percent of this group prefers to speak Spanish mostly or only. These are the heaviest Internet users among Hispanic consumers. They watch music videos and listen to general-market music-formatted radio.
Higher energy prices are proving to be a bit of a downer for small and midsize businesses across the country, according to a survey of nearly 1,100 business owners and executives conducted by PNC Financial Services Group from late August through early September.
Higher energy prices were ranked by 40 percent of respondents as the issue that would have the greatest negative impact on company performance. Next worrisome were further interest rate increases (21 percent) and the cost of health insurance (18 percent). Last spring, by comparison, rising interest rates (26 percent) were the top concern, followed by health insurance (24 percent) and then energy prices (18 percent).
As a result, small-business owners have toned down their expectations for growth and profitability.
"Overall, the outlook for their own companies has moderated a bit since the spring, which may have been the high point," says Stuart Hoffman, chief economist at PNC. "They're not pessimistic, just a bit more cautious."
Indeed, 63 percent expect sales increases over the next six months (down 7 percent from spring), 54 expect profit increases (down 5 percent from spring), and 29 expect to increase hiring (down 5 percent from the spring). One piece of good news on the inflation front is that slightly fewer owners–46 percent now vs. 50 percent then–expect to raise prices over the next few months, despite higher energy costs.
Thinking of setting up a benefits program for your employees, and wondering which are the best?
Small-business owners can review some of the programs preferred by bigger companies by checking out the 2005 winners of the Principal Financial Group's 10 Best Companies for Employee Financial Security. The program "recognizes the 10 small- and medium-sized companies that best exemplify excellence in employee benefits." (For a list of the winners, see www.principal.com.)
The companies range in size from 15 to 815 employees. Of that group of 10, nine offer wellness programs ranging from free preventive care like flu shots and weight management programs to onsite fitness centers; eight offer "life cycle" mutual funds in their investment plans where employees select a fund based on their retirement date and as employees near retirement, the portfolio automatically becomes more conservative; eight of the companies also offer one-on-one financial guidance for employees.
One benefit that may be gaining in popularity are health savings accounts. HSAs are high-deductible, account-based healthcare plans that allow employees to set aside money for healthcare expenses on a tax-favored basis. Two of the 10 already offer HSAs and several others are researching the possibility of offering them.
Many small-business owners might be noticing that their large customers seem to be cutting checks a bit more slowly than in the past.
It's not their imagination. According to a recently released study of the top 1,000 U.S. companies by REL Consultancy Group, large corporate customers are lagging on payments to their vendors. The portion of industry sectors paying suppliers more slowly than in 2004 jumped from 45 percent to 65 percent. The share of individual companies more sluggish in their payments than last year jumped from 46 percent to 56 percent.
Why is this happening? According to REL, large companies are trying to improve their working capital and cash position by squeezing suppliers. And while this might provide a temporary improvement in a company's cash position, it actually can be damaging in the long run since small businesses will ultimately raise their prices to cover the costs of waiting to get paid.
There's a ton of fascinating info on small-business start-ups in a new study from the Kauffman Foundation, an organization dedicated to fostering entrepreneurship. Using data from the census and the Bureau of Labor Statistics for the period 1996 to 2004, researcher Robert Fairlie of the University of California–Santa Cruz found the following, among things:
An average of 0.36 percent of the adult population created a new business each month. That translates into approximately 550,000 new businesses per month.
The entrepreneurship rate was relatively constant in the late 1990s but has risen slightly in the past few years from 0.36 percent in 1996 to 0.40 percent in 2004.
Entrepreneurial activity is substantially higher among men than among women. From 1996 to 2004, the average rate of entrepreneurship for men was 0.46 percent vs. 0.28 percent for women. In addition, the rate for men is on the increase, rising to 0.5 percent in 2002 vs. 0.43 percent in 2001.
Activity increased most in the West and South in the past few years. The entrepreneurship rate in the West increased from 0.42 percent in 2001 to 0.49 percent in 2004. The rate in the South increased from 0.35 percent to 0.41 percent.
This may not come as a shock to anyone who has managed a business–either large or small–but it costs a lot of money to play by the rules. And in at least one way, the burden falls more heavily on small businesses than on the Fortune 500.
According to a new study by the Small Business Administration, small companies spend considerably more per employee to comply with government rules than do big firms. The agency found that firms with fewer than 20 employees spend $7,647 per worker each year to comply with federal regulations. Companies with 500 or more employees spend just $5,282 per worker.
The rules accounting for the biggest chunk of the differential tend to be environmental and tax regulations. Complying with environmental rules costs 364 percent more per employee in small firms than in large ones. Abiding by tax rules is 67 percent more expensive in small businesses. Still, there's plenty of pain to go around:
The total cost for all federal regulations is some $1.1 trillion per year–11 percent of gross domestic product–-according to the SBA. That's up 16 percent since 2000 when adjusted for inflation.
