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The data cover a grab bag of businesses, from one-person operations to part-timers to eBay sellers, making analysis difficult
It's notoriously difficult to run a small business, but it's nearly as challenging to determine how well businesses are doing and how many jobs they create.
A 2004 report from the Small Business Administration's (SBA) Office of Advocacy states that there are 24.7 million businesses in the U.S., and that small companies with fewer than 500 employees represent 99.9% of the 24.7 million businesses, since the most recent data show there are just 17,000 large businesses. The SBA report also states that 580,900 small businesses opened last year, and 576,200 closed. Two-thirds of these new companies survive at least two years, while 44% survive at least four years.
But experts often question these basic statistics. William Dennis, a senior research fellow at the National Federation of Independent Business (NFIB), says it's necessary to be cautious when analyzing these figures. In the first place, he asks, what defines a small business? "I got an honorarium for a [recent] speech," says Dennis. "That's considered a business. If you have a yard sale and you sell over $500 -- that's considered a small business. They leave out virtually nobody, and they include very, very tiny businesses."
Including figures for business failures can be tricky as well. John Miller, a spokesman for the SBA's New York District Office, says the number of businesses that fail each year is hard to determine. "[The data don't] look at the underlying definition of businesses that go out of business," he says, "such as people who sell their business." He says that most small businesses are one-person operations.
William Bygrave, a professor of entrepreneurship at Babson College, says he's wary of talking of "failure rates," since "anyone who starts a business is a courageous person." But he's equally wary of the numbers for small businesses. "Even though almost all of the 24.7 million businesses in America are small businesses," Bygrave says, "12 million are part-time businesses -- that means they don't provide full-time employment to anybody."
"When we look at the overall statistics, those numbers may be approximately correct, but we're including all those part-time businesses," Bygrave says. "Since almost half of these 12 million businesses consist of just the owner for their income-tax returns, they file a [tax] return hoping it will grow into something -- but after a few years, they give up. They can no longer justify filing a return since their business is so small." This makes it more difficult for the SBA to determine how many small businesses there are, and whether these small businesses employ more than just one or two people.
The statistics on women business owners can also be hard to analyze. The Center for Women's Business Research (CWBR) states that one in 11 adult women is an "entrepreneur," and that nearly half of all privately held U.S. busineses are 50% or more women-owned. The CWBR also states that 10.6 million firms are at least half owned by women, and that "these firms employ 19.1 million people and generate nearly $2.5 trillion in sales."
But Bygrave says it's important to analyze how common it is for women-led businesses to employ more than a few people. For one thing, he says, it's becoming more common for professional women to stay at home with their families and to start a home-based business from there. These home-based operations tend to be part-time and would not employ many people.
Since these women may be choosing to work from home so they can be with their families, Bygrave says, they're starting a "necessity-based" business, "rather than a business out of opportunity." And working from home, whether you're male or female, can make growth difficult. "If you're trying to grow a significant business," Bygrave says, "eventually you can no longer operate out of the house."
Still, as the CWBR stats point out, there's continued growth in women-owned businesses. Between 1997 and 2004, the number of companies 50% or more women-owned increased at nearly twice the rate of all companies -- as did employment rates. Again, it's important to consider the size of these businesses and their number of employees.
CLUES ON EBAY.
One business that opens a window into the small business growth numbers and survival statistics is eBay (EBAY). Last year, A.C. Nielsen conducted a survey for the online retailer, and found that 724,000 Americans used the Web service as their primary or secondary source of income.
Bygrave calls this "The most amazing statistic I've seen in the past year," and says it's a testament to the power of the Web. "Most of those businesses would be part-time, gender-insensitive," says Bygrave.
But are eBay sellers considered small business owners? What happens when tax time comes -- how do they classify their "business"? Bygrave says the sellers would be considered "sole proprietors" and would have to file a tax return for their business. Although they wouldn't have to say specifically what they're selling, they would have to use the correct tax code. This means they would be classified by the SBA as a small business owner despite employing no one besides themselves.
Whether statistics are referring to eBay sellers, the number of women- or minority-led businesses, or the growth in the small business world, one thing is clear: With small business numbers, one should always take a second look. Yet even that can be tricky. Miller says that if a small business is sold, for example, this is considered a closure. But he also points out that, according to an SBA study, 33% of employer-firm closures were considered successful.
Or consider this situation: When the SBA says small businesses have generated 60% to 80% of net new jobs annually over the last decade -- and at the same time, states that small businesses are 53% home-based -- it's useful to ask how many people these home-based businesses employ and how they contribute to the job-creation statistics.
Questioning statistics provided by both the SBA and nongovernmental agencies is important, not because the numbers they provide are incorrect, but because there are so many different kinds of businesses that the statistics encompass. Interpreting what they mean can help in understanding what's involved in running a successful business.
CONFUSED BY THE STATISTICS?
Decline in small business owners' expectations about revenue growth, the general economy, and hiring 1
Growth rate of the number of women-owned businesses between 1997 and 2002 2
Growth rate of the number of businesses owned by Hispanics in the U.S. between 1997 and 2002 3
Growth rate of the number of firms owned by black Americans between 1997 and 2002 4
Percentage of women business owners who are willing to take above average or substantial risks when investing for their businesses in 2005 5
Percentage of inner city jobs held with small businesses in 2005 6
1 A new study from the International Profit Associates Small Business Research Board (IPA SBRB) stated that these expectations declined from 55% at the beginning of 2005 to 47.3% at the start of 2006. The report also showed that small businesses are providing increased compensation to employees. For 2006, nearly 70% of the businesses surveyed said they are providing raises with 36% providing raises of 5% or more and 33% providing raises of less than 5%
The U.S. Census reported in 2002 that this was twice the national average for all businesses, according to the 2002 U.S. Census report. The nearly 6.5 million businesses generated more than $940 billion in revenue.
5Center for Women's Business Research