CHARACTERISTICS OF SUCCESSFUL SMALL BUSINESSES IN SOUTHERN NEW JERSEY

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1 CHARACTERISTICS OF SUCCESSFUL SMALL BUSINESSES IN SOUTHERN NEW JERSEY ABSTRACT Robert D. Lynch Berhe Habte-Giorgis Rowan University Small businesses account for over 50% of private sector employment and have recently accounted for all net new jobs in the economy. Motivation, education, experience, and other characteristics of the successful small business owner/entrepreneur are of critical importance to educators and others who train and encourage the development of small businesses. This study looks at the characteristics of a sample of successful small businesses in southern New Jersey. INTRODUCTION It has become increasingly apparent that small businesses are the engines that drive the economy as it relates to the growth of employment. On a national scale, in 1995, small businesses (less than 500 employees) accounted for 99.7 percent of the total employer firms, and in 1996 for 56.5 percent of the private sector employees (SBA Office of Advocacy, 1997). From 1992 through 1996 they were responsible for all (11,182,000) of the net new jobs created as reported by the Small Business Administration Office of Advocacy (SBA Advocacy, 1998). In New Jersey, in 1996, small businesses accounted for 98.5 percent of employer firms and in 1994 accounted for 52.3 percent of employment. From 1992 through 1996, small businesses created 469,189 new jobs. Companies with 500 or more employees were responsible for the loss of 170,750 jobs (SBA Advocacy, Small Business profile, 1997). Although the characteristics of small business owners/entrepreneurs have been the subject of numerous studies for many years, it has become increasingly important to better understand these characteristics, as the importance of small business to a growing economy has become more evident. The U.S. Small Business Administration's Office of Advocacy, Office of Economic Research compiles and updates data annually obtained from the Bureau of Census, the U.S. Department of Commerce and other contracted sources (Table 1). In addition, there have been a number of regional studies and other studies that attempt to define which characteristics of the entrepreneur are more likely to lead to successful business operations. Background of Study This study was initiated as a class project of a senior-level small business class. The purpose of the study was to identify characteristics of small business owners that may have contributed to their successes in a three county area of southern New Jersey. The

2 students not only had to carefully review relevant characteristics, discuss and decide what they considered important, but following the completion of the survey, students visited respondents for more in-depth interviews. Success is not a well-defined term, but for the purposes of this study, a company with 10 or more employees was considered to be successful. TABLE 1 SELECTED SMALL BUSINESS OWNER CHARACTERISTICS Type of Firm # of Firms %Owners Female %College Degree Age>54 All Firms 17,253, % 2.9% 29.5% Over 10 employee 479, % 56.5% Retail 2,717, % Services 8,216, % Manufacturing 639, % Construction 1,973, % 11.1 Source: SBA Office of Advocacy. Characteristics of Small Business Owners and Employees Sample Students extracted a database of 600 small businesses from a library electronic database of 10,000,000 businesses (The American Business Disk). Businesses with sales of greater than $49,000 annually but less than $5,000,000, and with employees were selected. This sample represented approximately 2.28% of the total businesses in the three county areas. Nationally, firms with employees represented 2.78% (Table 1) of the total. A total of 144 usable questionnaires were returned; a response rate of 26%. Trends in the Economy of Southern New Jersey The economy of southern New Jersey (eight southern counties) does not necessarily mimic the national economy. It is largely retail and service economy with a continuing decline in manufacturing and farm activity. Growth in the casino industry in Atlantic City over the past 20 years boosted employment to over 48,000. Unemployment in New Jersey in August, 1997 was 5.0% compared with a national average of 4.9%. In the three counties surveyed in this study the rate was 4.5%. Southern New Jersey has a projected growth rate in non-farm employment of 13.7% from 1984 through 2005 compared to a projected rate of only 11.0% for the state (The Management Institute, 1997). Non-farm

3 employment for the state is estimated at 950,000 or over for 2005, while employment in the three counties of this study is estimated to exceed 500,000. Estimated total employment growth for the three counties and four major employment sectors is shown in Table 2. TABLE 2 THREE COUNTY PROJECTED EMPLOYMENT GROWTH ( ) Sector Retailing 17.3% Services 44.8% Manufacturing -0.78% Construction 19.7% Source: The Management Institute, 1995 SURVEY RESULTS Comparison of tables 2 and 3 reveals that 34.3% of existing businesses are in retailing, an area that is not expected to grow as strongly as the service sector (44.8%). The sudden surge in electronic commerce may further weaken retailing as an opportunity for small business. TABLE 3 BUSINESS DEMOGRAPHICS Sector Sample Nationally* Retailing 34.3% 12.9 Services 25.2% 43.0 Manufacturing 12.6% 7.3 Construction 11.2% 12.7 Ins & Real Estate 4.9% 6.1 Food 4.9% Communication 3.5%

4 *SBA Office of Advocacy. Characteristics of Small Business Owners and Employees TABLE 4 SALES Sales Volume $0-$74, % $75,000 - $149, % $150,000 - $499, % $500,000 - $999, % $1,000,000 - $4,999, % $5,000,000 - $9,999, % $10,000,000 or more 3.6% Two-third of the firms have over $ 1 million sales (Table 4), while 99% are 3 or more years old (Table 5). The mean number of employees is 19.7 full-time and 8.3 part-time. Respondents indicated that their businesses are profitable (92.9%). Seasonality of demand may be a problem with 21.7% of the sample reporting their business to be seasonal. Age of business is a strong predictor of performance of a small business (Fasci and Valdez, 1998). The survey results show that 92.3% of the businesses are over 6 years old. Combined with the profitability data, these results validate the use of the number of employees (10 or more) in selecting successful businesses. The future of the businesses studied is encouraging with 90.2% of the respondents stating that the market is either growing or stable.

5 TABLE 5 AGE OF BUSINESS AND DEMAND Years in Business Age of Business 0-2 Years 0.7% 3-5 Years 7.0% 6-10 Years 16.8% 11 Years or More 75.5% Demand Market Growing 55.2% Market Stable 35.0% Market Declining 9.8% Eighty percent of the firms are corporations or S-Corps (Table 6). TABLE 6 TYPE OF OWNERSHIP Structure of the Business Sole-proprietorship 12.8% Partnership 4.3% Corporation 53.9% S-Corp 29.1% Owner Characteristics Tables 7-11 present many of the key characteristics of the owners responding to the survey. There were no real surprises. The higher number of years in business (75% with 11 years or more) reflected our selection as identifying successful businesses. (Nationally only 55-65% of owners had 7 or more years of experience in their businesses). The percentage of women small business owners is relatively low, 16.4% compared to 25.0% for firms nationally with 10 or more employees. Retailing, services, manufacturing and construction sectors were the only segments broken out and compared to the totals. There were some significant differences as will be noted later.

6 TABLE 7 OWNER DEMOGRAPHIC CHARACTERISTICS Age % % % 50 and older 48.6% Education Less than high school 2.1% diploma High school diploma 49.3% Bachelor's degree 37.5% Graduate degree 11.1% Marital Status Married 84.7% Single/Divorced 15.3% Gender Male 83.6% Female 16.4% TABLE 8 MOTIVATION Motivation for starting business (May have selected more than one) To make money 31.6% To be independent 64.3% Job Security 14.7% Other 18.2%

7 TABLE 9 PERSONAL SUCCESS FACTORS Propensity for taking risks Help in success of venture Work Habits High risk-taker 18.9% Moderate risk-taker 71.3% Low risk-taker 9.8% Money 4.2% Good idea 12.0% Luck 3.5% Hard work 80.3% Had previous experience in type of business Average number of hours per week worked Would go into business again Have or did have a business plan 63.4% 54.7 hours 85.6% 54.8% TABLE 10 REQUISITE SKILLS Importance to the success of the business Mean Score (5=most important 1 =1east important Management skills 3.87 Marketing skill 3.38 Financial skill 3.19 Product ideas 3.09 Location 2.90

8 TABLE 11 ADVERTISING EFFECTIVENESS Advertising Effectiveness Mean Score (5=most effective 1=least effective) TV/Radio 2.4 Newspaper 2.9 Flyers 3.3 Word-of-mouth 4.7 Owners reported management skills as most important to the success of their business and found word-of-mouth the most effective advertising method. In addition to other advertising channels mentioned in Table 11, mailings and magazines were also noted as being effective. The results indicate that respondents do not use media advertising. This tendency may be an impediment to growth or remaining competitive in a dynamic market. Previous studies have shown that a high percentage of small business entrepreneurs are well educated. Education is also associated with high performance (Ahmed, 1997). This was supported by our study with 48.6% having baccalaureate or graduate degrees (Only 32.9% nationally for all firms). However, the construction sector had only 31.3% with Baccalaureate degrees. This same group had a much higher single/divorce rate as well as being younger and working longer hours. Also, they rated the importance of management and financial skills at a higher level, but were less likely to be profitable and have a business plan. Such condition leads to poor performance (Rue and Ibrahim, 1998). The services sector had the lowest single/divorce rate (8.1%), the highest percent of female owners (22.2%), worked the least number of hours (50.6 hours/week), had fewer years in their businesses, and were most likely to have a business plan (68.6%). A higher percentage of the services sector (66.7% vs. 55.2% of the total) defined their market as growing. Female Owner Characteristics Women constitute 16.4% of the sample. They tended to be younger (26.1% 50 or older compared to 48.6% of the total), were not as well educated (39.1% with college degrees compared to 48.6% of the total), worked fewer hours and were more moderate risktakers. These attributes are prescriptions for low performance (Fasci and Valdez; Kotey and Meredith, 1997). Women tend to measure their success in terms of self-fulfillment, while men tend to go for profit and financial success (Buttner and Moore, 1997; Moran, 1998; Caputo and Dolinsky, 1998). However, in many areas, the female owner characteristics were very similar to the total population. Female owners did indicate that they were somewhat less likely to go into business again (19.1 % vs. 14.4% of the total)

9 if they had it all to do over again. They were more likely to be in seasonal businesses (31.8% vs. 21.8% of the total) and were more likely to be running a 5 day/week business (45.5% vs. 35.7% of the total). CONCLUSIONS The research confirms much of the national demographic information, particularly that the highest percentages of small businesses (97.2%) are really small (less than 10 employees). However, small businesses with 10 or more employees employ 74.2% of the small business work force (SBA Advocacy, 1997). In our study, the owners in this group were highly motivated by the need for independence, had previous experience in the business, were moderate risk takers, worked hard (close to 55 hours/week) and were well over 40 years of age. A high percentage had college degrees. Most have or have had a business plan. They would do it all over again and valued management skills as the most important key to their success. Subsequent interviews by students confirmed that successful small business owners were highly motivated and dedicated. They valued every minute of their time but were more than willing to share their success stories with the students. REFERENCES Ahmed, N. (1997). Demographic and Financial Characteristics of Small Business Owners. Journal of the American Society of CLU & ChFC, 51(3). Bernice, K. and Meredith, K. (1997). Relationships Among Owner/Manager personal Values, Business Strategies and Enterprise Performance. Journal of Small Business Management, 35(2). Buttner, E. H., and Moore, D. (1997). Women's Organizational Exodus to Entrepreneurship: Self Reported Motivations and Correlates with Success. Journal of Small Business Management, 35(l). Caputo, K. and Dolinsky, A. (1998). Women's Choice to Pursue Self-Employment: The Role of Financial and Human Capital of Household Members. Journal of Small Business Management, 36(3). Fasci, M. & Valdez, J. (1998). A Performance Contrast of Male- and Female-Owned Small Accounting Practices. Journal of Small Business Management, 36. Moran, P. (1998). Personality Characteristics and Growth-Orientation of the Small Business Owner-manager. International Small Business Journal, 16(3). SBA Office of Advocacy (1997). Characteristics of Small Business Owners and Employees.

10 SBA Office of Advocacy (1998). Small Business Answer Card. SBA Office of Advocacy (1997). Small Business: Backbone of the New Jersey Economy. The American Business Disk, 5711 South 86th Circle, Omaha, NE The Management Institute of Rowan University (1997). Economic Data of Southern New Jersey (36th). Glassboro, New Jersey: Author. The Management Institute of Rowan University (1995). Economic Data of Southern New Jersey (30th). Glassboro, New Jersey: Author.