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In the Business of Cronyism: How Viable Is It Now to Own a Small Business?

Oct 14, 2020 | Business & Enterprise, Short-form

Reading Time: 6 minutes

Suddenly, for business in 2020, it wasn’t only fat cat bankers living off the public tax dollar. In fact, at the drop of a hat, nearly 5 million small businesses ran for their spot in the welfare line. Was this what it was supposed to look like to own a small business now?

Certainly not a well-functioning small business, one that profits enough to weather the very likely possibility of disruption, any disruption. And this is true whether or not these businesses had happily or unhappily gone along with lockdowns or whatever other economy-destroying restrictions.

Now, that’s probably not going to be a popular observation.

But the fact remains that millions of small business owners were favored over ones who couldn’t get the money in time. Or not enough of it. Or who didn’t even fucking want it.

Watching the mad dash for the financial crumbs, and the cries of who was or wasn’t essential, will be something many will never forget. And from my conversations, a number of small business owners who had decried banker bailouts just a decade earlier were all too happy to become the very cronies they had denounced… even as they privately admitted, in some cases, to not needing the money at all.

Or to hoping their small business competitors would get wiped out by not getting their own handout.

So, it’s worth asking again, is this really what we’re expected to believe it looks like to own a small business in the 2020s? And are small business owners on two sides of a crony divide now, ones who happily take bailouts and those who don’t?

The Rise and… Crawl of the Small Business in America

As we embark on the economic portion of our adventure, there’s a lot of complexity to face.

First, you probably agree that it’s never been easier to start a small business in America. Yet, at the same time, starting a successful business is something entirely different.

Of course, small businesses cover an enormous range of industries. There are also several legal structures they can take advantage of, from LLC to S-corp. Complicating the situation is the “rise of the freelancer,” a sometimes grifter class of self-employed “consultants.” They remain little more than outsourced employees, lacking benefits paying self-employment taxes.

But by and large, most small businesses, nearly 75%, are little outfits with 1 to 100 employees. And because most sole proprietors are also non-employers, we can infer that a sizeable chunk of small businesses, about 30% or 9 million, are LLCs and S-corps of 2 to 100 employees.

Why does all this matter?

In trying to determine if it’s worth it to own a small business in the 2020s, you have to keep in mind that there’s a lot going on here.

But when you look at business tax data from the IRS over the past 15 years, it doesn’t really matter how you slice it. While businesses in the $100k to $200k region have, curiously enough, surged since the last financial crash, the far majority of business income has remained below $75k annually per return.

Or put into plain English: many small business owners overwhelmingly appear to make, at best, the same as the average American household. An enormous number of them, however, don’t make even that much, while shouldering intense risks, putting in lots of effort, and often dumping their own wages back into their endeavors.

All Business Gross Adjusted Income by Category

Of course, someone will always bring up business deductions for taxes.

For the life of me, I’ve never understood why regular people, especially professionals, seem to think business deductions are magic. After all, you have to spend the money to get any benefit. It’s not like its free money or something.

But let’s introduce a few more pieces of not-so-pleasant economic data.

In fairness, small business longevity appears to have remained fairly stable over decades. That’s probably the only good news.

But to sum up: you probably get paid less than the average US household, can’t save for retirement, have little or no operational savings in case of crisis, and might even work a second job.

These are the economic realities, and risks, of owning a business in 2020.

The Small Business at the Leisure of Technocrats

Let’s turn from the risks of owning a small business to the more intangible benefits. Or at least the ones everyone talks about.

How have these changed since the government’s response to the Covid crisis?

Once upon a time, if you owned a small business, you could count on these sorts of vague rewards.

  • More independence and freedom for yourself
  • A greater degree of control in the process
  • The prestige of forging your own path despite the risks
  • The choice to own multiple businesses
  • Being able to embrace and channel your passions
  • Creating opportunity for others to find meaningful work
  • The possibility of gigantic financial payoffs

Of course, most of these are no longer really possible.

Now, as a political pragmatist, I believe there’s probably far less difference between public and private intuitions than most people realize. But that’s probably a conversation for another day.

The fact remains that, if you’re a small business owner, you have a new partner. And that’s your favorite local crony.

No longer are you able to create your process, set your hours, and open your doors.

In fact, if my private conversations are any indications, businesses which have opened back up are experiencing an exasperating ride. Often, I’m hearing of costs literally doubling overnight through politicians’ intrusions into the entire enterprise.

And that’s just the bookkeeping part of things, never mind the actual implementation part.

In my opinion, you might as well throw out all those intangible benefits at this point. Politicians are willing to break every part of our economy going forward and show almost zero basic understanding of the world around us.

And while revenue is not the tell-all factor, you only need to look at one chart, below, to see exactly what I mean. Your business might no longer be free to operate without severe, even catastrophic, shocks from your local bureaucrats.

Owning a Small Business After Covid

Remember all that economic data we just went over? Yeah, those were what they were calling the very, very best of times. Given this one chart, it’s about to get a whole lot worse. And with it, those intangible benefits are shrinking alongside devastating effects on revenue.

The Name of the Game

So, we might as well ask: given all this information and the newly-minted class of local small business cronies…

Are these even businesses at all anymore?

And probably most importantly, why would you want to start or own a small business in the 2020s with all this going on?

Now, I don’t want to discourage anyone from owning a small business (although the facts above aren’t very rosy). When it comes to small business owners, I probably have the most respect for them out of anyone who I write for or work with. They are often incredibly hard working, driven beyond reason, and truly innovation in the face of big challenges.

We’ve seen how, sometimes without reason, regulation and costs can be dramatically increased while disrupting revenue streams beyond what can really be anticipated. We’ve also talked about how, if you switch gears away from your current business endeavor, everyone will wonder if you’re ever going to be successful again.

Of course, it’s always going to be an individual decision whether you think it’s worth it to own and operate a small business.

Still, my take is that it can be worth it but with a few things to keep in mind.

The game has cleared changed. And since corporations are far more likely to be politically connected, you need to get savvy about what game you’re really playing.

If you’re starting or already own a small business, consider these…

  • Focus on and plan to stay lean in your operations
  • Determine which parts of your business may remain “essential”
  • Look closer at incorporating frontline supply chain positioning in your process
  • Prepare to deal with much more volatility and disruption
  • Skip global or even national logistics and re-look at regional
  • If you’re new to the game, get very comfortable with extreme uncertainty
  • Remember, taking bailouts makes you more fragile, not less
  • Decide where you stand on your local civic situation

For me, at least as an entrepreneur, I will likely move business elsewhere, with a focus on the very frontend of the supply chain. This will include keeping operational savings high and a focus on greatly underserved markets which we’ve already identified.

Now that we’re savvy to the new game, we’ll gladly play along. But why keep going despite everything I’ve just outlined?

For better or worse, the answer for me to business is always, yes.

2 Comments

  1. At this point regulators stall and control more than most recognize. Unfortunately regulation is put inplace by non business operators…those without the hands on knowledge of how business operate and what small business need to stay healthy. The debth of regulation we face today results in undue added cost to the overhead. That added cost and administrative burden influences the risk/cost to profit ratio and in the end….survivability

    Reply
  2. At this point regulators stall and control more than most recognize. Unfortunately regulation is put inplace by non business operators…those without the hands on knowledge of how business operate and what small business need to stay healthy. The debth of regulation we face today results in undue added cost to the overhead. That added cost and administrative burden influences the risk/cost to profit ratio and in the end….survivability

    Definitely a salient point, Michael. But what is the difference between those small business owners and non-business operators who both play security theatre for their share of the welfare? Wouldn’t the death of the entrepreneurial spirit then lead to greater survivability, even as it increased long-term fragility?

    Zombie small businesses in zombie cities, if you will. What’s the difference anymore and does it really matter?

    Reply

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