December 23, 2012 in Business

Small businesses are facing a challenging future

Joyce Rosenberg
 

Dane Stangler has never owned a small business, and doesn’t expect to ever own one. But he’s in a position to understand the challenges facing people who own small companies.

Stangler is the director of the Research & Policy department at the Ewing Marion Kaufmann Foundation. His job is to help the foundation determine how it can encourage and mentor entrepreneurs. His department conducts research and surveys and analyzes studies done by researchers at other institutions. So he is familiar with the issues that entrepreneurs and small businesses face.

Some small-business issues, like income taxes, aren’t a problem for entrepreneurs whose businesses may not be making a profit, Stangler notes. But small companies of all sizes face some of the same problems: the weak economy and the prospect of federal budget cuts.

Stangler spoke recently with the Associated Press as Congress was haggling about the fiscal cliff, the combination of billions of dollars in tax increases and budget cuts scheduled to go into effect Jan. 1. Economists have warned that if Congress doesn’t prevent those tax increases and budget cuts from going into effect, the country will be at risk of going into a recession. And it’s believed that small businesses would suffer the most.

Here are excerpts from the interview with Stangler:

Q. How important is government policy for small-business owners?

A. If you are a business owner, your primary concerns probably have to do with your business. Policy impacts at the margins but I still think that for most entrepreneurs and for most business owners, their top concerns are still customer demand, because consumer spending is still making its way back. Policy is very important, but getting sales, getting customers, running your business, dealing with employees probably still dominate the daily thinking of a lot of business owners.

We worked with a company called Thumbtack.com on a survey of 6,000 businesses and individuals. One of the things our researchers dove into was the impact of taxes. And we released a paper in October that said it’s not necessarily the level of taxes (that’s the problem). That doesn’t matter, because no one expects to pay no tax. It’s the sheer complexity of dealing with taxes. So it’s not necessarily the rate, it’s just the burden, the time burden, the money burden of compliance, and not knowing all the different kinds of taxes you’re subject to.

Q. What is the biggest issue with the fiscal cliff?

A. The fiscal cliff is not only about the tax code. It’s just the uncertainty. I know that’s a catchall term that everyone uses, but it’s for real this time. Everyone always says businesses hate to deal with uncertainty, and it kind of has a hollow ring to it because just the nature of running a business, you’re always dealing with uncertainty. But at times like this, when politicians have manufactured a crisis, this is serious uncertainty, because no one knows how it’s going to change. If we do go over the cliff, we’re sort of going to get whipsawed because the Internal Revenue Service is preparing for the government going over the cliff, putting in place all the new tax forms, and then, six weeks later, when they reach a deal, we’re going back to the way things were.

Q. Is there any long-term damage done by this kind of situation to small business?

A. We’ve obviously got challenges. But there’s very few people who would bet against the U.S. in the long term. That is borne out by the fact that we continue to see a strong level of entrepreneurial activity – people starting business. That act is itself a signal of optimism and confidence in the U.S. and its long-term growth.

Q. No matter how the cliff is resolved, it’s expected that eventually there will be billions of dollars in cuts to the federal budget. What will be the impact on small business?

A. It’s probably finally dawning on lots of people, especially on the political right, what a large portion of the economy government spending is. Entitlements are a gigantic chunk and productive spending (highways, universities, infrastructure) is really decreasing as a percentage of government spending. Nonetheless, that decreasing share of productive spending and even that consumptive spending on entitlements, that’s still a massive chunk of the U.S. economy. And there are tons of U.S. businesses dependent on the government.

Q. What kind of chance does a young company have to sell a product or service to the government in this climate?

A. There are still government programs that mandate that a certain percentage of government contracts have to be given to small business. Those percentages are probably not going to go away. But it does mean the dollar amount probably declines. It’s not just a federal issue. State government budgets have been seriously affected the last few years. They’re getting healthier but they’re certainly not back to where they could be or should be.

Q. Is this a good time or a bad time for someone to start a company?

A. My own personal view is that it’s never a bad time to start a company. There are good cases to be made that starting in an economic expansion is great because consumer demand is high and people will spend money. There are arguments to be made that starting in a downturn, whether it’s a recession or a bear market or a sluggish recovery, is also a good time. If you’re a tech startup for example, the demand for technology has been pretty constant the past few years. There’s also schools of thought that say if you start up in a recession, it’s sort of a trial by fire. If you start up in hard times, and you survive, there’s less competition and you come out of it stronger.

Q. Given what has happened in the economy the last five years, is it going to be harder to be a small-business owner and expand your company in the next five to 10 years?

A. Yes, in some sectors. Take retail. There’s the Wal-Mart effect – you’ve seen huge consolidation in retail. You’ve seen a huge consolidation in the information technology sector. We’ve sort of entered a “you eat or be eaten” atmosphere. Investment banks and especially the (stock) markets in the retail and information technology sectors simply aren’t welcoming anymore toward small, innovative companies. You either have to get big fast by being an acquirer or you have to be acquired.


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