What Defines a Small Business? Middle-market Business? Large Business? How does a Business Survive?
While each of us have our own definition of small, middle market and large businesses, the general guidelines for a small business are based on the US SBA revenue and employee limits for eligibility for the SBA 7(a) loan program. These definitions have received additional coverage in recent years as the Payroll Protection Loan Program (“PPP”) used SBA small business definitions to establish eligibility for that government program.
The SBA small business definitions are based on either the dollar amount of annual revenue or the number of employees and vary greatly by NAICS codes. For example, revenue caps range between $2.0 million and $41.5 million, and employee count caps range between 100 and 1,500. A complete list of the May 2022 SBA size guidelines by NAICS code is found at this link here.
As an example of the variety of sizes that are defined as small businesses, a dairy operation must have no more than $3.25 million of revenue, while a cattle feedlot is allowed no more than $19.5 million of revenue. Gold ore mining is allowed 1,500 employees and anthracite mining is allowed 250. Rice milling is allowed 500 employees while chocolate and confectionery manufacturing from cacao beans is allowed 1,250 employees.
Middle market firms are generally defined as businesses with between $10 million and $1 billion of annual revenues. This is the size of middle market businesses as defined by the Harvard Business Review. Other sources would put the lower limit as low as $5 million or as high as $50 million.
Large businesses are those businesses that exceed the middle market size range.
Why does this matter?
During the period from March 2020 to March 2022, the economic landscape was impacted by required shutdowns, labor availability, new government standards to allow reopening, stimulus money, changed consumer trends, supply chain issues, inflation, and a host of other related impacts on financial performance. This meant some businesses closed never to reopen, some businesses reopened but changed their business model, and some businesses reopened with their pre-existing business model. As the pandemic moves further into the past, and businesses are left with inflation, labor, supply chain, and commodity price shifts, the need for businesses to change and adapt is increasingly important to success.
The US Chamber of Commerce conducts a survey of middle market business leaders to measure their optimism related to future revenues, net earnings, and the overall economy. The Q4 2021 survey indicated that middle market firms are more optimistic related to future earnings, net earnings and the overall economy compared to what is portrayed in the news. Even with the inflationary pressures and supply chain difficulties experienced during the period leading up to the survey, more than half of the survey respondents expected revenues and earnings to increase. Concerns were noted regarding inflation, and higher prices for goods and services. There was also fear of tax increases and government spending.
The number of new startup businesses is encouraging. The US Census Bureau published monthly statistics regarding new business formation, measured by application for Employer Identification Numbers (“EINs”). The graph published in May with April data shows the number of new businesses formed from April 2011to April 2022. After the drop off in new business formation in April 2020, new business formation has been strong.
The amount of new business formation does vary by geographic region. While 400,000 or more new businesses have been formed monthly since later in 2020, the growth in new businesses is focused on the South. The Northeast has experienced the least amount of growth.
The number of new businesses formed in 2021 reached 5.4 million, which is a new record, surpassing the previous record of 4.4 million new businesses formed in 2020.
The Federal Reserve estimates that approximately 600,000 small businesses fail each year. While the pandemic was expected to have far reaching impacts on businesses, and certainly it was devasting to many, the number of excess business failures during 2020 was estimated at 100,000.
The Administrative Office of the US Courts reported that business bankruptcy filings decreased from 21,655 in 2020 to 14,347 in 2021. However, that trend has turned with new business and consumer bankruptcies filed in March of 2022 at a 33.5% higher rate than in February.
While the headwinds for businesses are strong, with inflation, labor, supply chain and commodity prices leading the way, there is also optimism in the small and middle market sectors. This is encouraging.
Lenders, business owners, accountants and consultants need to remember that the key to success for businesses is optimism coupled with attention to detail, analysis, and financial management. These are definitely challenging times, but there are tools businesses can use to improve their opportunity for success. It is time to dust off some of the tools used forty years ago when inflation was last at this level, and couple those tools with new ideas based on the new economic world of today.
We remain focused on helping businesses succeed using tried and true tools of analysis and planning coupled with attention to the changes in the overall economy.