By Cliff Ennico
For the past 30-plus years, this has been a column for people who run small businesses. But what exactly is a “small business”?
Well, 50 years ago, we knew what a small business was: a storefront somewhere in town that could accommodate only a few customers at a time, run by a local family and selling everyday stuff. That type of small business still exists but many, if not most, are on the road to extinction (or migrating online). Today there are two types of “small business”: the traditional small business and the startup. While the two are often lumped together, there are considerable differences between them, and people who serve those businesses (including yours truly) need to be mindful of those differences.
A traditional small business is one which:
• Engages in a Retail, Service or Other “Non-Scalable” Business. A non-scalable business is one where the profit margins remain relatively stable or decline as the business grows. Such a business has to spend more to earn more and the growth curve looks like a straight line. Just about any retail or service business is non-scalable: A service provider’s ultimate product is his or her time, and there are only 24 hours in a day. The only way such a business can grow is for the owners to work more hours or for the business to add people who will work more hours.
• Serves a Local or Regional Market. Some studies show that most people will not travel more than 3 to 5 miles to go to a gym. So, if you run a gym (and are lucky enough to be open during the pandemic), virtually all your clientele probably come from within a very small radius. Generally, any business that draws almost all its customers from a 5- to 15-mile radius is a traditional small business.
• Is Owned by the Same People Who Run the Business. There is no distinction between “labor” and “management” in a traditional small business. The owners are the people who do the work.
• Is Designed to Stay Small. There is no “exit strategy” for a traditional small business. It is designed to run until it shuts down. If it’s a family-run business, the objective is to create an income stream for future generations of family members.
By contrast, a startup is a small business that:
• Engages in a “Scalable” Business. A scalable business is one where the profit margins increase as the business grows, and the growth curve is a parabola. Think manufacturing, technology and media.
• Serves a National, International or Global Market. A startup draws its customers worldwide.
• Is Owned (at Least Partially) by Passive Investors. Ownership and management are not the same in a startup. Nobody expects passive investors (such as “angels” and venture capitalists) to pitch in and work weekends when orders fall behind.
• Is Designed to Grow Big and “Exit” at Some Point. Investors in startups are not committing to the long term; most want to see a return on their investment in five to seven years. That will happen only if the startup launches an initial public offering or is acquired by a much larger company. Startups plan their exit strategy from the moment they are formed.
Not only do startups and traditional small businesses have different needs for services, but their cultures are significantly different as well, and they place different demands on their lawyers, accountants, consultants and other service providers.
As businesses generally become more dependent on technology and operate on the Internet, the distinction between startups and traditional small businesses is blurring. Yesterday’s brick-and-mortar retail store on the local commercial strip is a web-based business today selling goods nationally or worldwide; just go to any UPS store on a Saturday afternoon and count the number of boxes.
During the COVID-19 pandemic, many small restaurants discovered they could not only survive but also increase their profitability by encouraging online orders and curbside delivery. They are selling more, and they find they don’t need as many waiters, bussers and kitchen staff — which increases margins, to the point that a significant number of restaurants are opting to become “ghost kitchens” without onsite tables and serving staff.
Traditionally, small businesses financed their operations with bank loans, while startups were able to tap into venture capital and the securities markets. The growing popularity of crowdfunding as a means of raising capital has enabled many traditional small businesses with large social media followings to tap into equity capital markets for the first time without the need to deal with banks. Recent changes to the securities regulations allow businesses to raise up to $5 million a year via crowdfunding, and many businesses engaged in food, beverage and entertainment businesses are taking advantage.
If you are a popular local business, start thinking like a startup. There are three strategies you need to adopt now:
• Reduce brick-and-mortar operations to a minimum: Make it a goal to generate more than half your 2021 sales from online customers.
• Cast your marketing and advertising efforts to a wider geographic area and get comfortable with shipping and delivery options.
• Build your following of satisfied customers on social media and start thinking of them as future passive investors.
Cliff Ennico (crennico@gmail.com) is a syndicated columnist, author and former host of the PBS television series “Money Hunt.”
COPYRIGHT 2021 CLIFFORD R. ENNICO.
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