moneyFYI
Financial Freedom Is Merely Organized Common Sense
Family Businesses Matter
Sometimes we hear about how Walmart, Amazon, or other big stores hurt Mom and Pop operations. While true and in many ways unfortunate, it misses the point we need to know about. The Mom and Pop image is beyond simplistic.
Consider another image
Let’s stop the Mom and Pop vision even though it is common. Businesses don’t run based on personality. They operate based on decisions, and follow through. A more realistic description is to address them as Owner-Managed Entities. OME.
Owner-managed business are the huge sector in the economy.
- There are 24.2 million family businesses, usually OMEs, in the United States. That is about one for every 14 people.
- They employ 62% of all US workers. Almost 100 million people. That’s ana vaerage of for so many are tiny, but not all.
- They contribute 64% of the GDP. About $13 trillion
To round-off, Owner-managed entities are involved in nearly two thirds of our prosperity.
For some reason they are not seen to be important. You will recall president Obama’s ignorant remark to “Joe the Plumber.”
Why are they ignored, lied about, and often punished?
The answer is quite simple. Governments operate by their own set of rules. One of those rules is you favour those who can do the most for you.
OMEs are often tiny. Even the larger ones do not curry political favour very well and they are defenseless against a large player who does.
Large companies grow in two ways. They create new markets,or they take market share from incumbent entrants. One of the easy ways to take market share and discourage new entrants, is to have the government create regulations that are fixed cost heavy and variable cost light. If Amazon has a regulation that costs $50,000 to meet plus $1.00 per employee they are not affected. Even with a million employees the amount disappears in their operation. What about someone with 20 employees? They care about the $50,000.
You might reasonably ask why the government does not have an ombudsman who can protect smaller businesses from predatory politically motivated regulation.
They do not because there is not enough concentrated influence in the OME sector.
Building influence.
In Canada, we have The CFIB – Canadian Federation of Independent Businesses. It is 50 years old now and has 95,000 members. Still not a cohesive force, but growing. Smaller business owners tend to be too busy to deal with everything. That is one of their systemic weaknesses. Time is a scarce resource and together with government filings, meeting with lawyers and accountants, training staff to meet the needs, most don’t allocate time to something that could help. It isn’t urgent enough. Recall, “The urgent is seldom important and the important is seldom urgent.”
The CFIB is the lobby group specifically related to this sector of the economy. They can influence some decisions that affect their members adversely, but not all. If you are the owner-manager of a business even if it is just you, consider joining. The annual fee is not excessive and there are ancillary group buying factors that can reduce some of your other costs.
You can learn more at their website CFIB
Selling Urgency
Activists and governments of all kinds use urgency to drive their program. If we don’t act on climate change in the next decade, the world will end is obvious nonsense, nonetheless presented as fact. Covid-19. Who manages their mandates. You of course, and you do it for free.
You might notice your tax rates will increase. You might also notice employee costs are rising. Why? Because of weak decisions affecting the supply chain and to offset the resulting inflation. Having trouble finding workers? Is there a government subsidy program you are paying for that causes that?
Urgency is expensive because the problem is poorly known.
The invisible problems
With respect to many problems, big businesses are not as affected as small. If you have one job opening in a 10 person business, you have a problem. At Amazon or Walmart it would take a 100,000 openings to affect them proportionally. They don’t have 100,000 openings and politicians can set the problem aside for now.
If you want to grow, you do it by reinvesting earnings and by borrowing. Income taxes are adverse if you must reinvest. Small businesses have a slight tax advantage in Canada, but it would be better if earnings reinvested in the business were not taxed at all. Essentially, earn your low tax rate.
Minimum wage doesn’t affect bigger businesses because they are likely paying more anyway. In their case paying more is convenient and the cost is less than the cost of employee turnover and training. They can pass the costs through easily enough. Many small businesses don’t have the luxury of paying for convenience and flowing cost through is usually difficult.
There are jobs in every business dedicated to some service that provides little benefit. They are not worth the hourly rate of minimum wage plus all the other cost factors imposed. When faced with that situation in a bigger business, automation is the defence. Capital is scarce in smaller businesses. compliance costs are seen as wasteful.
In 1974, Ryerson professor Rein Peterson studied small businesses in Canada. He wrote a book about it. Small Business: Building A Balanced Economy. He found in every sector, eg manufacturing, transportation, retail and wholesale, the number one concern of operators was they didn’t have people who understood them to talk to with about their problems. There are few problems a business can discover that have not already been solved somewhere else. There was once a federal government program where retired executives would undertake projects for smallish businesses. The federal government paid a large share of their fees. That kind of program is responsive to real needs and is not expensive compared to the potential benefit.
What can we each do?
There are few of these businesses that are not local. Shop locally.
Support business trying to influence local politicians and bureaucracies to operate in ways less harmful to them. Do you even know how much municipal tax your employer pays. Ask, I think you will be astounded.
Beware of the the bureaucracy. It oftentimes expects the businesses to serve them.
CFIB publishes a report about how communities compare in their approach to businesses. the report for 2018 is here. I have not seen more recent. It covers 125 communities in Canada and many of them have clear deficiencies they might choose to address if they knew. A little louder voice around those issues can easily achieve some improvement. Attitude matters. Businesses seen as the cash cow for local government will go elsewhere or more often, one a community could have attracted fails to come.
Help the community understand what businesses want and don’t want. No community is ideal for every business. Inventory strengths and identify weaknesses.
What can the community and local government do?
- Have a strategic vision. What do you want ideally. There is a vast difference between a steel mill and a high tech research lab.
- How does your community fit within that vision?
- Some of the weaknesses are structural and can be repaired. If your community has a capable unemployed workforce with skill in some area, trying to attract a business that can use those skills should be easier than finding one that has no need for them. It might not be ideal, but it provides jobs and the development of businesses that support it. Never ignore the multiplier effect.
- Assess your shipping factors. If it is costly to move goods to and from your community, low value, heavy or large products are pretty much out of the question.
- Objectively assess pluses and minuses, and develop your plan within that context. Begin working at remedying the shortfalls. Some common problems are:
- Too little access to training for skilled employees. Community college and universities.
- No easy way to hire contract people with unique skills for projects. In Waterloo Ontario, the University of Waterloo has a world class faculty in computer science. If you are a business in Waterloo who needs such skills, it would be easy enough to find someone. High tech tends to concentrate where it can interact and learn.
- Inadequate shopping or community infrastructure. If you are going to attract a business notice that the decision makers are likely moving to the community too. If it doesn’t meet their family’s expectations – shopping, the arts, sports, schools, and so on, they are not coming.
- Safety, cleanliness, order. Part of the infrastructure thing. Being a good place to live is crucial.
The takeaway
Owner managed businesses are the heart of the economy. ignoring them is counterproductive. Ignoring them leads to hurting them, often unintentionally.
“Our prime purpose in this life is to help others. If you can’t help them, at least don’t hurt them.” Dalai Lama
Understand more about smaller businesses and act to help them or at least to not hurt them.
Have a cost benefit analysis for bylaws. Avoid creating big problems to solve tiny ones.
Have the community government act to make the business environment attractive.
Have local government lobby other players in the community who are creating problems.
If you are thinking about transferring your business to your children, do you have any clear idea what their business environment will be like?
I help people have more retirement income and larger, more liquid estates.
Call in Canada 705-927-4770, or email don@moneyfyi.com
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