Acquisition Advisors | Where’s the recovery for small businesses?
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18 Feb Where’s the recovery for small businesses?

Published in the Tulsa World
Thursday, February 18, 2010

If recent economic surveys are accurate, owners of small businesses are not experiencing an economic rebound. Not by a long shot.

They also have little confidence that better times are near. This is in contrast to both the stock market run-up that continues unabated and frequent media reports of improvements in global macroeconomic indicators.

“2009 did not end on an uplifting note,” reads the January Small Business Economic Trends report issued by the Federation of Independent Business.

The group’s recent survey of managers of smaller U.S. businesses — companies with a mean employee count of 13 — found the following:

  • Profits continue to fall. Just 12 percent of the owners reported that fourth-quarter earnings increased from their companies’ third-quarter results — although the third quarter was terrible for earnings.
  • Revenues fell in the past three months and did not increase in the ensuing three months. The percentage of business owners reporting lower sales for the quarter remained near the record low reported in March 2010, and 51 percent of the owners surveyed expect even lower revenue in the next three months.
  • Capital spending remains at a record low. Just 44 percent of the companies made a capital expenditure in the past six months — the fewest since the survey began in 1979 — and a mere 18 percent plan to make one or more in the next three to six months. That’s just 2 points above the 35-year low.
  • Owners continued to shed inventory and plan to shed more. The inventory index recorded its largest decline in the survey’s history. That’s shocking, given that small businesses have been shedding inventory since mid-2007. Moreover, more reductions can be expected as owners who plan to reduce their inventories outnumber those who plan to increase them.
  • Owners became more pessimistic in December, and overall optimism remained at historic lows.

“Optimism has clearly stalled,” the federation’s report stated. The Index of Small Business Optimism fell in December to its second-lowest reading since 1980. The lowest was last March.

This report reflects what I see and feel and hear in my daily work advising company owners on merger-and-acquisition issues. And it’s pretty amazing, and scary, given:

  • We are two years into this recession. One would expect that inventories would have been reduced to minimums long ago, and that profits would begin to rise because of prior cost reductions.
  • Interest rates remain at historic lows (an economic stimulus).
  • The U.S. government is spending like mad (an economic stimulus).
  • Federal and state taxes remain below historic peaks (an economic stimulus of sorts).

When will the recovery arrive for owners of small and midsize companies? Your guess is as good as mine but, historically, recessions do end and it seems there can be nowhere but up from here. Of course, we’ve been saying this for months and, according to the survey, we continue to be proven wrong.

Finally, given that smaller private companies employ a majority of the U.S. labor force, a broad recovery will not begin before they start growing, spending, hiring and — once again — earning a profit.

David L. Perkins Jr. is the managing director of Acquisition Advisors, a merger and acquisitions advisory firm that specializes in midsize companies.

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