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Proven initiatives for sustained small business growth in the 21st century We hear a lot about how small businesses drive the U.S. economy, create most of our jobs, and create hundreds of millionaires next door. The real truth is that making a small business a success isn't easy. In fact, most small business owners don't get rich. This book presents the straight truth on small business success. It's not a get-rich-quick scheme and it doesn't offer cure-alls for every small business. Instead, it outlines real, ...
Proven initiatives for sustained small business growth in the 21st century We hear a lot about how small businesses drive the U.S. economy, create most of our jobs, and create hundreds of millionaires next door. The real truth is that making a small business a success isn't easy. In fact, most small business owners don't get rich. This book presents the straight truth on small business success. It's not a get-rich-quick scheme and it doesn't offer cure-alls for every small business. Instead, it outlines real, effective principles for continued small business growth and success. Written by business growth expert Steven Little, The 7 Irrefutable Rules of Small Business Growth skips empty pro-small business positivism in exchange for real-world, practical solutions. Readers will find answers to small business owner's most important questions on such topics as technology, planning, hiring, globalization, and the near-term future of small business in America
Small business success plays a vital role in this country's mythology. You know the stories: the poor immigrant with 50 cents in his pocket who goes on to run a chain of 20 restaurants, the husband and wife who toil away for years and get the one big break that makes them millionaires, the grandma who makes cookies in her kitchen and ends up running a company with hundreds of employees, and the two nerds who create a software program in their garage and then sell it to IBM for a few billion dollars.
We love these stories because they capture the American spirit. The rugged individual who triumphs against all odds is quintessentially "us." Yet, growing a company is by no means a Horatio Alger yarn, and the myths are often offset by a more sobering reality. A special small business report in the Wall Street Journal in 2004 led off with the following:
Last year, the U.S. gave birth to over half a million new firms. Equally telling, nearly the same number of firms closed their doors in the same period. What this means is however much we glorify and obsess over success in the workplace, the notion of failure must go hand in hand with it.
That's an important point. While there are indeed factors that make it a good time to be an entrepreneur in America, there are also factors thatmake it a challenging time to be running your own business. In fact, if someone asked me whether it is the best of times or the worst of times for small business in America, I could argue either point of view. In my opinion, the current state of small business could be accurately described as both the best and worst of times-and I explain why later in this chapter. But first, let's take a realistic look at what the term small business encompasses.
WHAT IS SMALL BUSINESS?
Is there really any such thing as small business? The term conjures up a wide range of imagery. The U.S. Small Business Administration (SBA) defines both a sole proprietorship and a firm with 499 employees-and everything in between-as being a small business. An individual selling quilts at a monthly flea market would seemingly have little in common with a 400-person software design firm. Obviously, lumping all small businesses like these together is ridiculous. In some ways, the SBA has admitted as much, in that its own definitions for what constitutes a small business run for 29 pages. (A 2004 effort to simplify the description continues.)
So here are the facts. You may think you don't need to know this to grow your business, but I encourage you to stay with me. The U.S. Census Bureau 2002 report showed that there were 22 million small businesses operating in the United States. However, look at the numbers a little more closely, and A Realist's View of the Small Business Landscape you'll quickly see that approximately 17 million of these businesses don't have any employees. Some are simply shells set up by accountants and attorneys for tax purposes. Others are enterprises that can't or don't want to get any larger than they already are. Despite not having any employees, you are probably a small business if:
You sell candles, cleaning products, or cosmetics on a very part-time basis and make a few hundred dollars in profit per year.
You lost your job in a corporation but got hired by the same company as an independent contractor.
You are 70 years old and retired, but you do a little consulting on the side.
You have a booth at local art festivals to sell your handmade crafts.
You buy things and "flip" them for a profit: cars, rental houses, collectibles, and so on.
You live off the income from your investment activity.
There's nothing wrong with these enterprises. They make money for somebody, so the IRS rightfully considers them more than a hobby. Some of them even give people a pretty luxurious lifestyle. But these "small businesses" seldom lead to more employees being hired, and very few of them grow beyond a one-person entity. In many cases, the person conducting the work doesn't want the business to grow. The intention is to make a living or earn a little extra spending money.
Other nonemploying firms are truly small businesses interested in growth. The following are examples of the nonemploying firms interested in growth versus the comparatively static types previously listed:
You've worked in the same industry for a number of years, and you've recently decided to forge out on your own to build the proverbial "better mousetrap."
You are a skilled craftsperson who hasn't needed another person yet but hopes to reach that point someday soon.
You've been in business for quite a number of years as a sole practitioner but are now giving serious consideration to expansion.
You've been in business only a short time but have always had a goal of growing your customer/client base.
After years of hitting singles as a one-person business, a customer approaches you with a home-run opportunity that you can't fulfill by yourself.
For the purposes of this book, I assume that a business interested in growth either is or plans to be an employing firm. Are there examples of one-person firms that achieve growth through outsourcing and "virtual teams"? Absolutely! Technology is making this easier and easier every day. But at this point, these companies are in the distinct minority.
This book targets those who want to grow their business. Throughout, I assume that you already have a small business-probably with employees-or that you're intending to get to that point sooner rather than later. Most of the observations I make are aimed at helping you grow a business that probably has at least a handful of employees but hasn't gotten so big that it has taken on a corporate life of its own. It's in the size range of roughly 5 to 99 employees that a lot of the important growth milestones take place in a company's development. However, these numbers are rather arbitrary and are used primarily because the government divides up segments of data at these points. If your business is smaller than five employees-but you're trying to grow-you'll also find just as many good insights and ideas that will help you get to the next level.
Understand, however, that it is the fast-growing companies that really create job growth. The Ewing Marion Kauffman Foundation, which promotes entrepreneurship in America, notes: "New fast-growth companies comprise around 350,000 firms out of a total of six million U.S. businesses with employees. Yet, this small base of companies created two-thirds of net new jobs in the 1990s."
The Small Firm
If you have at least one employee, you have made a first dramatic step toward growth. That first hire changes everything. It changes your division of labor, day-to-day responsibilities, productivity, cost structure, and tax status. Firms with even one full-time employee have more in common with those who have a handful than they do with most nonemploying firms.
In 2001, there were more than 3.4 million firms that paid some payroll but had four or fewer employees. More than 5.5 million people work for these firms. Granted, some of the companies are undoubtedly cases of a nonperforming family member being paid for tax purposes, but this is a huge group nonetheless. The category represents over 60 percent of the employing firms in this country. It also represents the wellspring from which many fast-growth companies emerge.
The 5- to 99-Employee Firm
This is the category that most big business marketers think of when they are targeting "small business." More than 2 million companies fit into this category, employing more than 35 million Americans. This is where you find the emerging growth companies. It is here where the first big leaps in growth occur: moving from a half-million dollars in revenue to $2 million, from $2 million to $10 million. Every year, Inc. honors the 500 fastest growing, privately held companies in this country. The majority of these Inc 500 firms fall within this category.
Don't get me wrong; a lot of companies in this category do not fit my definition of growing. A significant portion are indeed declining. However, it is within this category that I usually find the most current and compelling ideas on growth.
The 100- to 499-Employee Firm
To have reached this level, firms in this category have already experienced at least one period of significant growth. Almost no one does a start-up with 100 or more employees. According to the SBA, in 2001 there were more than 85,000 businesses in this category. While they represent less than 2 percent of all employing firms, more than 16 million people work in companies this size.
MOST MISLEADING SMALL BUSINESS MYTHS
As mentioned before, I can argue that this is both the best and worst of times for small business in America. Whenever I tell people I have good news and bad news, they want to hear the bad news first to get it out of the way. I know that I risk losing your enthusiasm (and believe me, you're going to need plenty of that) by starting this book on a cautionary note. None of us can succeed, however, until we first acknowledge the difficulties inherent in managing a private enterprise. Despite what most politicians and many people in the general public think, small business success is not quite as easy as some would have us believe. As a serial entrepreneur buddy of mine says, "It's gotten real easy to start a new business. Everybody wants to help you now. The problem is, it's getting harder than ever to actually make a buck at it." Seventy-two percent of respondents to a May 2004 Inc. poll agreed: "Entrepreneurship is getting harder."
The following positive myths about entrepreneurship are repeated so often, and in so many ways, that many people accept them as facts.
Myth 1: Business Owners Have More Independence
If you are a small business owner, especially one with a family, you know what a joke this myth is. The small business owner that Hollywood portrays is talking on her cell phone from the beach house, golfing with his buddies in the afternoon, or attending social functions during his many free evenings. She has loads of time to go to the kids' ballgames and recitals or take leisurely vacations. It's a nice life indeed. Those workaholics who neglect their spouses and kids or spend late nights at the office don't own their own company-they work for heartless corporations.
We know this portrayal is not true. According to the 2003 Inc. 500 survey, nearly a third of these fast-growth company heads work more than 60 hours a week.
Running alongside this notion of personal independence is the idea, "Finally, I'll be my own boss." For many, this is one of the primary reasons they start a small business. They've had it with being told what to do. But as most business owners soon discover, they've simply traded one boss for a whole host of other bosses. The simple act of incorporation calls for properly dotted i's and crossed t's in triplicate. Whether the lender is your brother or your banker, once you borrow money, you've created a potential supervisor. The state and federal revenue services demand quarterly reports just like any manager.
Once you hire your first employee, you've really got someone to answer to. Employees are funny. They expect you to perform a variety of functions especially for them. They assume that their problems outweigh any you may have. They consistently second-guess your decisions. They expect you to be there when they arrive and still be there when they leave. Sounds just like a boss to me!
One big difference, though: These bosses expect you to pay them for their efforts, whether you have the money in your account or not.
Please understand this. I am far from being anti-employee. Chapter 8 is devoted entirely to the importance of people in your organization, and it's the primary theme throughout the book. I'm simply trying to point out how taxing all of these new overseers can be. It's one of the biggest surprises for the emerging growth business owner. Consider yourself forewarned.
Myth 2: Business Owners Make a Lot of Money
If you are a small business owner already, this one doesn't need much of an explanation. Many wannabe entrepreneurs fantasize about leaving the confines of working for someone else. They think starting their own company will make them wealthier than being an employee. In some cases it is true, but on the whole, it is not.
According to the National Federation of Independent Business (NFIB), the average business owner makes between $40,000 and $50,000 per year. That's not terrible-it pays the bills-but a lot of skilled people could make that amount or more working for someone else with a lot less risk and fewer hours.
For a growing small company, however, the rewards can indeed be great. Among the Inc. 500 class of 2003, 78 percent reported a net worth of over $1 million. Nearly half were multimillionaires. One in five was worth more than $7.5 million. Keep in mind that these are the elite, however. The median five-year growth rate of these 500 companies was a whopping 692 percent.
The lesson from these statistics is this: Running a business that is surviving will make you a living, but perhaps less than you would make working a salaried job with someone else's company. Run a company that is growing rapidly, however, and there is serious money to be made. The distinction is in the pace of growth.
In 1996, authors Thomas J. Stanley and William D. Danko published their landmark book, The Millionaire Next Door (Marietta, GA: Longstreet Press, 1996). Their 258 page book has much to say about the wealthiest people in our country. The quick, one-line synopsis most people remember from this book is that most millionaires work in unassuming, everyday endeavors. In other words, they are, on the whole, welding contractors and pest controllers, not investment bankers and trust fund recipients. To many, including me, this was a fascinating revelation. It also helped fuel an ever-growing fire of enthusiasm for entrepreneurship.
It is also important, however, to fully understand the authors' findings. It is true that more than two-thirds of the millionaires in this country can be described as self-employed. The authors' research makes that very clear. However, it does not follow to say that the self-employed are most likely millionaires; far from it. While this book was written several years ago, the misconceptions some people took away from it still permeate public consciousness.
Myth 3: Business Owners Are Funded by Venture Capital and Angel Investors
The National Commission on Entrepreneurship sums up this myth nicely in its 2001 report, Five Myths About Entrepreneurs: "Of all the myths and misunderstandings surrounding entrepreneurship, the role of venture capital is perhaps the most exaggerated." Venture capital and money from "angel" investors flowed like water in the middle and late 1990s, but most of it went to high-risk/high-potential-reward investments in tech companies, especially on the West Coast. According to the Commission, "In 1999, California received slightly more than 43 percent of all new venture capital investment-a whopping $20.8 billion. Of this total, nearly $17 billion was invested in Northern California."
There were more than 600 venture capital firms chasing the next big thing in the year 2000. Once the tech boom busted, the firms and money flows went with it. At the end of 2003, the surviving venture capital firms (down to fewer than 200) were sitting on about $84 billion in capital, but at least half of that was estimated to be earmarked for second-round and third-round funding of existing obligations. Only $18.2 billion was actually distributed to companies. Even though the funds were flush with cash, they were still being very picky about where they put it.
What happens to the lucky souls who do manage to score venture capital funding? It's not always a gift from Santa Claus. Owners, who have staked their life savings and reputation on a business, often end up giving up majority ownership and control. In some cases, they get pushed out of their own company.
Excerpted from The 7 Irrefutable Rules of Small Business Growth by Steven S. Little Excerpted by permission.
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Preface: Did I Really Say “Irrefutable”?
About the Author.
Chapter 1: A Realist’s View of the Small Business Landscape.
Chapter 2: Are You Really the Entrepreneurial Type?
Chapter 3: RULE 1: Establish and Maintain a Strong Sense of Purpose.
Chapter 4: RULE 2: Thoroughly Understand the Marketplace.
Chapter 5: RULE 3: Build an Effective Growth Planning System.
Chapter 6: RULE 4: Develop Customer-Driven Processes.
Chapter 7: RULE 5: Put the Power of Technology to Work.
Chapter 8: RULE 6: Attract and Keep the Best and the Brightest.
Chapter 9: RULE 7: See the Future More Clearly.
Appendix: Personality Tests That Measure Entrepreneurial Types.