The Small Business Owners and their Businesses

What do small businesses in America look like? Who is the typical small business owner?

The SBSI survey provides a wealth of information on owner and business characteristics based on reports by the owners themselves. The definition of a small business will vary from source to source. In the SBSI, a small business is defined as either having a payroll and/or providing half of the owner’s household income, which leaves out the minor side-businesses that account for a small share of U.S. output and jobs. “Small” is defined as having fewer than 100 employees. There are about 6 million small businesses in the U.S. that have a payroll and under 100 employees.

The Small Business.

For the first time, the SBSI Survey examines the global reach of small businesses, revealing an interesting story about how the sector may be helping to counteract the trade deficit that the U.S. has with other countries. As background, in the most recent SBSI wave, 33 percent of small businesses believe their industry is becoming more global, compared to only 5 percent who think it is becoming less so. Yet, the trade area for most small businesses is mostly local; 62 percent of small businesses report that the bulk of their business/customers comes from the local metro area, 14 percent from a multiple state/metro region, 14 percent from the nation, and 10 percent from multiple countries.

It is interesting that one out of ten small businesses trade predominantly with customers outside the U.S., but the global reach is even greater. A full 19 percent of small businesses sell goods or services to customers in other countries. Small businesses are less likely to import, with only 11 percent reporting they buy or procure goods or services outside the U.S. Only 2 percent have employees outside the U.S. Summing it up, America’s small businesses are twice as likely to export goods and services as they are to import. These customers may be buyers from overseas or South America, or they may be customers closer to home including the extensive cross-board trade with Canada and Mexico.

The study provides an up to date profile on the typical small business. Not much has changed since the last survey wave; the typical small business has a single owner, operates within a local area, has a single location, and has sales in the low six figures. A profile is as follows:

• 31 percent have just one employee (the owner), and the median number of employees is 3
• 49 percent are home based, and the number has steadily risen over the past three waves, possibly due to the effects of the recession
• On average, small businesses have 1.6 owners; 59 percent have a single owner, 31 percent have two owners, and 10 percent have 3 or more owners
• 13 percent are minority-owned
• 30 percent are women-owned (over 50 percent of the business is owned by women)
• 86 percent have just a single location
• The median age of small businesses is 15 years, and 22 percent have operated 5 years or less
• Over a third of small businesses are just getting started:
  – 5 percent are start-ups and 35 percent are early growth businesses
  – 47 percent are considered mature businesses
  – 10 percent are in various phases of closing or being sold or transferred
• The median annual revenue is $182,700; among those reporting their sales, 43 percent gross less than $125,000.

The Small Business Owner.

Small business owners cross a wide spectrum of demographic groups, so it is not possible to describe a “typical” owner. Compared to the general population, however, the small business owner is older, more likely to be male, highly experienced, and relatively affluent. The following is a summary of owner traits quantified in this study:

• Small Business owners are slightly older than the U.S. population; 76 percent are at least 45 years of age, and 16 percent are 65 years or older
• 70 percent are male and 30 percent are female
• Over half have a college education, but not all:

– 19 percent have only a high-school degree and 3 percent have less than a high school degree
– 32 percent have attended trade school, have some college, or a two year degree
– 45 percent have at least a four year college degree

• Owners have considerable industry experience; 60 percent have worked in their industry for 20 or more years
• 80 percent of owners started the business, and 48 percent of the founders have started more than one business
• 82 percent work in their business full-time
• Among those willing to share the information about their annual income, 43 percent earn at least $100,000 per year.

Who are the most competitive small businesses?

Competitiveness correlates with characteristics of the business and the owner, but the success factors may change over time due to economic circumstances. For instance, in the last wave, factors such as having multiple owners, gender, and education were related to small business success, but these factors are less important or even vanished as predictors of business success. Some of the factors that track with competitive success (and a few that are not currently important) are shown in Figure 35. One driver of small business success remains consistently strong: the phase of the business. Over half (57 percent) of “highly competitive” small businesses are mature concerns, while almost half (47 percent) of “failing” businesses are in the start-up or early growth phase. The mature enterprises, with their established customer base, have the clear advantage in the current economic environment.

Company size is also a success factor for small businesses. For instance, “highly competitive” small businesses have a higher percentage of businesses with 10 or more employees and have median revenue three times greater than “failing” businesses. The less successful enterprises are also more likely to be home based, although it could be financial problems that led to the business attaining this status.

In the last SBSI wave, demographics seemed to matter, but now that the recession has spread to four out of five small businesses, the relationships are not as strong. The more competitive small businesses tend to have a higher share of owners who are at least 45 years of age.

Figure 35