Nov 30 2015

What is a “Small” Business?

Almost everything written concerning the business world is about large, publicly-traded companies, multi-million dollar venture-funded start-ups, and billion dollar IPOs.  Despite all this digital ink, small and mid-sized businesses still remain the engine of our economy.

Depending on how you define small and mid-sized, these businesses represent one half to two thirds of our economy.  Two thirds to three quarters of all working Americans are employed by these businesses.

How to define “small”?

The term “small business” has most people thinking about very small businesses.  Sole proprietors and Mom-and-pop businesses.  The local dry cleaner, plumber, or consignment shop.  But in reality, small businesses cover a large range of sizes.  From the self-employed person working from home all the way to multi-million dollar enterprises.

Federal and state governments like to categorize businesses by their number of employees.  I prefer using revenue (annual sales).  It’s the simplest and most market-oriented way I know to categorize a business as small, medium, or large.  More or less, this is how the business transaction community (of investors, intermediaries and advisers) view it:

size_chart1

As you can see, there is a lot of room between $100,000 and $5 million.

How many small businesses are there?

According to the U.S. Census Bureau, there are about 5.8 million U.S. businesses with paid employees.  Of these, about 76% have sales under $1 million.  They don’t break out $5 million and up, but I suspect 95% of businesses have sales under $5 million.  So, as far as I can tell, the number of small businesses outweighs the number of medium businesses by a ratio of about 20 to 1.

As a whole, small businesses make up a large part of our economy and American jobs.  So the next time you read about another billion dollar internet company (with no paying customers or profits), just take a moment to remember the contribution of small and mid-sized businesses.  They are the ones providing most of the jobs in America, and driving the real economy.