Ever Hear of The Small Business Economy?

If you watch television, read the newspaper, or scan the Internet, you might think the Fortune 1000 is the backbone of our economy. But you would be wrong. The truth is that small businesses, generally defined as companies with 500 or fewer employees, employ half of the US workforce, or 120 million people. There are a whopping 28 million small businesses in the US, but only 5.5 million of these have more than one employee, and only a thousand of those are in the Fortune 1000. Small businesses create about two thirds of all new jobs in our economy. Just over 500,000 new businesses form, and just under 500,000 shut down (or merge), each year.

The classification as a “small business” is helpful in some ways, and very confusing in others. Yes, these companies all have 500 or fewer employees, by definition. But they vary tremendously in other ways. One useful classification scheme divides small businesses into four categories in increasing order of size and growth rate: non-employer businesses, main street businesses, supply chain businesses, and high growth businesses.

Four types of small businesses that keep the economy going

Non-Employer Businesses

Roughly 75% of small businesses have just one employee. These are typically accountants, attorneys, consultants, handymen, solo contractors, and hundreds of other types of “solopreneurs”. In 2011, this group had average revenues of $44,000, but 80% reported revenues of less than $50,000. Total revenue generated by non-employer businesses reached $989.6 Billion in 2011. You might be surprised by the fact that the number of non-employer businesses is growing faster than the general economy. In 2002 there were just 17.6 million non-employer businesses; in 2011 there were 22.5 million.

Main Street Businesses

So-called “main street” businesses make up the largest category of employer businesses. Roughly 22% of employer businesses are in this category. These are the “mom and pop” businesses we all see every day — the small grocery stores, print shops, small restaurants and bars, small medical clinics, dry cleaners, etc. More than half of these small businesses employ fewer than 5 people. There are roughly 5 million main street businesses in the United States. Main street firms are generally characterized by very slow growth after the initial start-up period.

Supply Chain Businesses

The next largest category is the companies that sell products and services to the government or large corporations. This category consists of roughly 500,000 businesses, or roughly 2% of all employer businesses. These businesses often grow much faster and much larger than main street businesses. They tend to be quite profitable since they operate in narrow niches and have very large, stable customers. But they can also fail in spectacular fashion when the big businesses they depend on change direction or go under.

High Growth Businesses

The smallest category, roughly 1% of all employer businesses, includes many high-tech start-up companies, but also includes fast-growing businesses from other sectors (including franchises). These are the companies that appear in the “fastest growing company” articles and rankings. In a typical year, there are roughly 200,000 such firms.

Challenges

There are several difficulties with this classification scheme. Small businesses are almost always privately held, so data is sketchy; and reporting is minimal, especially at the non-employer level. Furthermore, businesses can easily shift from one group to another (for example, a restaurant forms a franchise, raises a large volume of money and suddenly expands to 50 locations), or even disappear (they go out of business or merge). So the groupings described above are not perfect.

The 2% Solution

Almost all the business news we read, see or hear focuses on the top 2% — the giant businesses (the Fortune 1000) and the high growth businesses. The other 98% of the economy gets virtually no attention from news media, banks, or private investors. Sure, they get some attention on “Small Business Saturday”; and banks, mainstream news organizations and the government all talk about how they care about small business, but the reality is otherwise.

It wasn’t always this way in the past, and it doesn’t have to be this way in the future. Small businesses are starting to raise their profile, and are banding together to change things.

References:

US SBA