April 2009 Archives

I would like to be the first to welcome the United States Association of Small Business and Entrepreneurship (USASBE) to Belmont University.  We will be hosting USASBE here at Belmont through early 2011.

We are delighted to have USASBE on our campus.

A big congratulations to Becky Gann, who will serve as the USASBE Interim Executive Director.  Becky has served as the Program Coordinator for our Center for Entrepreneurship since I arrived here almost six years ago.  I will miss Becky's steady hand running our co-curricular programming in the Center.

Thank you Becky for all you have done for our students!!

I have been test driving the new HP Office Jet Pro 8500 printer this week.  The last couple of days I have been exploring some of the other features that this all-in-one can offer.

The printer has slots that allow for many standard sized photo cards to be inserted directly into the printer.  Since our camera's card does not fit one of the slots sizes on the printer, I used the front USB port to serve as a bridge.  It was reasonably easy to use this way, and the colors on the printed photo were excellent.  The print and copy quality of the printer would allow for reproduction of brochures and other promotional materials at a level of quality that would be more than satisfactory for most small businesses.  I printed a full size photo on an 8 ½ by 11 sheet that had bold colors and a reasonable picture clarity.

When it comes to using a new fax machine or scanner I tend to want to curl up in a fetal position in the corner.  It is a situation where the Luddite in me comes out in full force.  I was one of the very last in my circle of entrepreneur friends to install a fax machine back in the late 1980s.  I claimed it was because I did not see the cost benefit, which was partly true, but it was also because the thought of having to learn another new technology overwhelmed me.  After all, I had just learned how to use the personal computer only a couple of years before that time, and I was still getting over that trauma.

Luckily, the fax and scanner controls are simple enough on this machine for even someone like me to figure out without too much hyperventilating. 

The feature I was most interested in trying out was that it is wireless.  I tend to roam about our home with my laptop - although my home office is in our upstairs loft, I spend many mornings blogging and catching up on things on the back porch, or on colder or rainy days working in our family room.

To use the wireless feature, the printer has to be connected to your wireless router.  Unfortunately, our wireless hub is set up at my wife's computer station at her kitchen desk.  The printer is just too large to put by her spot, so I cannot try this out until I move the modem and router to my loft office where I keep my printer.  That project will have to wait until things calm down from this busy spring term.

As for my conclusion about this printer?  It is a great workhorse for small businesses than need a reasonably robust and versatile all-in-one.  It is probably overkill if you have only occasional or very light use of its features.  But if your business regularly needs high quality printing, faxing and scanning, this machine is a reasonable value, as it is comparable in quality to a laser printer and much more efficient to operate.

As part of this blog marketing initiative, my readers can receive a coupon code to get 20% off the HP Officejet Pro 8500 Wireless All-in-One by clicking this link.

(This is a sponsored post).

There is some evidence of the seeds of creative destruction at work in the economy.

Although venture capital spending was down in the first quarter of 2009, innovation and entrepreneurship are steaming ahead without infusions of VC dollars.

From an article by Scott Harris at MercuryNews.com:

The sheer volume of entrepreneurial activity is striking, and often seems utterly independent of the investment dollars available. One reason is that so much can now be done so cheaply via the Web.

Consider the thousands of applications that techies have developed for Facebook and the Apple iPhone -- business platforms that didn't exist a few years ago. Consider the startups launched on shoestring budgets by Y Combinator and other incubators. Consider the boom in back office software-as-a-service (SaaS). Consider, also, the boom in clean tech -- startups that require serious money -- as well as the abiding interest in the life science sector.

This is clearly becoming the age of the bootstrapper.  Don't focus on investment dollars or massive infusions from the SBA as a sign of activity.  Focus, instead, on the grassroots bootstrapping entrepreneurs who will reinvent our economy -- if we just would get out of their way!

My test drive of the new HP Office Jet Pro 8500 printer continued this evening.

I had several long documents that I needed to print this evening at my home office.  Being a bootstrapper at heart - or as some in my family might say, "cheap" - I like the relatively low cost of printing with this machine.  Inkjet is always going to be lower cost than a laser, and this printer seems to perform at a reasonably comparable speed to my HP laser printer at the university.  It has a quality that is clean and crisp.  This inkjet has certainly come a long way from the models I had even a few years ago in terms of print quality.

HP claims that the printer will save 50% over a color laser printer.  Add to this that it can print front and back - saving paper in quite a few of my print jobs - and the fact that you can recycle the cartridges through HP for free, you have a fairly economic printer.

OK, but shouldn't a bootstrapper buy the lowest cost printer on the market?   Not always, as I like to remind people that bootstrappers are cheap, but cheap with a purpose.

It is possible to create a lot of materials that not that long ago would require working with a printing company.  The printed materials that you can create with this printer will be considerably less expensive than if you have to send it out.  And it will look much more professional than the low cost printers I have traditionally had in my home office in the past.

Simple stationary, brochures, and so forth can be created with this printer that is perfectly acceptable for the purposes of many small businesses.  By tying into HP's creative studio, it is possible to create some professional looking materials.  Be aware that some of the links through this site do carry additional costs.

So what don't I like so far?  The one main drawback is that the machine is a bit noisier than I am used to with the smaller printers I have used in the past.  But all in all, so far so good.

As part of this blog marketing initiative, my readers can receive a coupon code to get 20% off the HP Officejet Pro 8500 Wireless All-in-One by clicking this link.

(This is a sponsored post).

I have been preaching about the need to build strong cash reserves in small businesses ever since I first started teaching entrepreneurship.

While some people have taken my words to heart, many assumed that the good times will always roll.  This latter group of entrepreneurs acted as if the truism "cash is king" was a mantra for spending more, rather than saving more.

Most of the ventures that come out of the other end of this recession intact and ready to roll, will be those that went into the recession with healthy cash balances in their bank accounts.

Times are getting tight for many entrepreneurs, as seen in this piece by Simon Covel in the Wall Street Journal:

During past downturns, business owners might have turned to a home-equity line of credit, a personal loan or credit cards to shore up finances. But this time, real-estate values have plummeted, leaving many with less equity to tap, and bank credit is virtually nonexistent.

It's not uncommon for owners to give up salaries from time to time to give their companies a temporary lifeline, but business advisers and owners say the prevalence of salary cuts now is unusual even for a recession.

So what should you do if your cash is tight and you are hanging on by a thread?  Realize that your options are few and that it is time to tighten your belt both for your business expenses and for your personal finances.  Employment continues to soften, so the prospects of a paycheck from someone else's business are not that great.  And starting another business to replace the one that is struggling will likely require even more cash that it will take to keep this one afloat.

And once you survive?  Remember the lesson you have learned.  Cash is indeed king.  Don't ever let yourself get complacent about your business's future success again.

Once your business begins to recover, build up your cash as soon as you can.  Thirty days is the minimum you should always carry -- it will get you through the short term bumps in the road.  Then work toward ninety days of cash reserves, or more if you can.

If this recession teaches you anything it is that rainy days are not your biggest worry -- "rainy years" are what you need to plan for.

I am taking part in something that my colleague Dr. Robert Lambert would call the new age of marketing. 

Through my association with Forbes.com, I was contacted to try out a new model of HP printer, the Office Jet Pro 8500.  They said that they would send me the printer for my home office down here in Franklin, Tennessee.  I was asked to set it up, use it, and blog about it.

While I have been taking ads at my blog for quite a while, this is the first time I have been asked to integrate information about a product in my blog by a sponsor.

I reminded them that I am a blogger, and as such, tend to rant on and on about what I think about things.  I asked them, "Do you understand what that might mean?  I will not say something unless I really believe it to be so.

They assured me that they understood - they get it.

Since I have had HP printers in the past and been satisfied with them, I agreed to give their new printer a test drive.

So let me be completely clear - this is a sponsored project, so this is a sponsored post.

Now I am like a kid on Christmas when I get a new piece of equipment - I can't wait to open the box and see what is inside.  Unfortunately, the box arrived the day I flew out to California with our students this past week.  So tonight is the first chance I have had to open the box, see what is inside, and set it up.

This is Not Your Father's Oldsmobile

As I opened the box my first thought was, "This puppy is really big.  Will it even fit on my desk??"  Well it did - as it turned out its footprint was not that much bigger than my old printer and it fit just fine on my file cabinet.

While a bit more complicated than my earlier, more basic printers, the set-up was not overwhelming.  The pictures helped this Luddite blogger make it though with only a couple of moments of head scratching.

The print heads and ink cartridges were easy to access and easy to install - they are accessible directly from the front of the machine.

Then I turned it on...but, all I got was an error.

I looked up the on-line support and found the number for phone support, as I don't do well with on-line chat support systems. 

I was connected quite quickly, and found out that I had a static problem.  It was easily solved.  Then the support person offered to help me with the rest of the installation, which I gladly accepted.  All in all, it was excellent service.

As part of this blog marketing initiative, my readers can receive a coupon code to get 20% off the HP Officejet Pro 8500 Wireless All-in-One by clicking this link.

(This is a sponsored post).

Our students who won the Entrepreneurial Challenge this past weekend at Delta Epsilon Chi impressed the judges not only with their pitch, but with the promotional piece they worked up while in Anaheim.  Bootstrap marketing at work!

Twenty three Belmont students competed in the international competition hosted by Delta Epsilon Chi this past week.  Out the 1,250 students in attendance, Belmont students won the following awards:

Entrepreneurship Business Plan competition:  Andy Tabar won 1st place (included a $1,000 award) and Julie Zaloba was a top ten winner

Entrepreneurial Challenge:  Andrew Birchfield, Julia Cecere and Brandon Littleton won 1st place (and $5,000 award) and Noah Curran and Julie Zaloba won second place (including a $2,000 award)

Travel and Tourism:  Noah Curran was a top ten winner and Julia Cecere was a national finalist

Business Ethics:  Kaitlin Adams and Susan Harbison national finalists

Marketing Management: Kirstin Long and Mandy Thompson were national finalists

Fashion Design:  Andrew Birchfield was a national finalist

Kirstin Long won a $500 for an essay advertising campaign

Congratulations to our winners!

And congratulations to all of our participants!

My column in today's Tennessean looks at the changing nature of the banker/entrepreneurship relationship:

A lot has changed in banking during this economic crisis. But what can entrepreneurs expect from bankers once credit starts to flow again?

We should expect the rules to be more restrictive on bankers' ability to lend to small businesses since they will be under tighter scrutiny from federal regulators.

Banks lending to small business will go back to a more traditional and conservative approach based on cash flow, personal guarantees and collateral.

Traditionally, bankers operate with a business model that tries to minimize risk. They are responsible for protecting customers' deposits held in their banks.

On the other hand, entrepreneurs seek out opportunities that can result in high returns, but their ideas often carry significant risk.

Entrepreneurs need to understand which factors bankers will use to determine what is a "bankable business" based on the traditional business model of a typical bank.

Businesses must be able to qualify for bank credit on their own standing.

This has very little to do with the things that get entrepreneurs excited, such as opportunity, upside potential and vision.

To a banker, a bankable business is one that will pay back its loans with very little chance of anything going wrong. So, rather than getting excited about untapped markets or product innovations, bankers look to three main factors. They are:

Is there adequate cash flow?

Bankers define "adequate cash flow" not as being just enough excess cash each month to cover monthly loan payments, but significantly more than enough excess cash flow.

Also, bankers want to see this cash flow already occurring, not projected in the future within a business plan. That's why bankers usually are not the best sources of funding when you open a business.

Get a track record and some cash flow, and you will find that bankers are much more receptive.

Can an owner pay back the loan?

Forget about the corporate veil of protection from creditors when it comes to bank loans.

A bank will require personal guarantees, which means that if the business cannot pay the loan, you will be expected to pay it personally.

Diana Ransom had a story yesterday in the Wall Street Journal on pricing in today's economy:

The pressure to slash prices can be hard to resist. But businesses should try. Too often, dramatic price cuts lead to lower profits -- and dilute a company's brand.

But ignoring the importance of price in today's economy also can be devastating. "Consumers are looking for value right now," says Jeffrey Cornwall, the director of the Center for Entrepreneurship at Belmont University in Nashville, Tenn. The days are over when companies could demand premiums simply for providing stellar service and better-quality products, Mr. Cornwall says.

Ransom suggests five approaches:

1. Switch to Performance-Based Pricing -- offer a lower base price and only get more if your service or product delivers as promised.

2. Offer Less-Expensive Products -- add some lower priced options to your mix to keep people coming for business if their budgets are tight.

3. Use Less-Costly Materials -- helps you offer lower prices, but keeping your margins in place.

4. Add Slimmed-Down Services -- offer a simpler offering to customers to meet their more limited budgets

5. Offer Extra Services -- stand out from competitors by offering more value for the price

I am in California with 23 of our students who are competing in the International Delta Epsilon Chi business event.  There are 1,250 students here competing this year.  Postings may be a bit spotty, as our schedules are quite full.

I did want to share the news that we have a new edition of our textbook Entrepreneurial Financial Management coming out in the next week or so through M.E. Sharpe.

We have add some new chapters and updated the rest.

If you want to buy a copy from the publisher click here.

If you are an instructor and want a review copy click here.

I will be adding a permanent link at the blog in the next couple of days.

The Nashville City Paper ran a cover story yesterday on entrepreneurial bootstrapping written by Candace Moonshower.  From her story:

Every generation has its inspirational maxim, and it is not surprising that these sayings are often associated with getting somewhere quickly and achieving something meaningful. Who hasn't heard 'Just Do It'?

Back in the day, when men and women wore boots and boots had straps, we were exhorted to pull ourselves up by said bootstraps and achieve the near-impossible through hard work, tenacity and our own initiative.

These days, our boots may be sneakers or flip-flops, but in the midst of hard times, we're rediscovering our bootstraps.

Venture capital investment retrenched to the lowest level since 1997 during the first quarter of 2009.  VCs invested just $3.0 billion in 549 deals in the first quarter of 2009, according to the MoneyTree Report from PricewaterhouseCoopers and the National Venture Capital Association.

Quarterly investment activity was down 47 percent in dollars and 37 percent in deals from the fourth quarter of 2008 when $5.7 billion was invested in 866 deals. The quarter, which saw double digit declines in every major industry sector, marks the lowest venture investment level since 1997.

Don't look to VC backed deals to be the engine that leads us out this recession.  The biggest drop in deal flow was for venture receiving first-time financing.

Friedrich Nietzsche said, "That which does not kill us makes us stronger."

So it seems to be for many entrepreneurs during this recession, according to the results of the American Express OPEN Small Business Monitor.

• More than three quarters of entrepreneurs believe managing through the recession has made them better business owners.
• Four in ten business owners have an optimistic outlook on near-term business prospects, on par with one year ago when the macroeconomic climate was significantly different.
• Nearly four in ten entrepreneurs feel the current economic environment creates opportunities for their business.

While optimism has stabilized, business owners are still managing their firms with caution -- bootstrapping more than ever.

Consistent with the NFIB survey I wrote about a couple of days ago, this survey found that capital investment plans remain very low, hiring plans are down significantly, and many entrepreneurs are adjusting their own retirement plans. Forty-two percent of business owners plan to make investments as a way to grow their business over the next six months, down from 53% last spring. Just over one-quarter of entrepreneurs have plans to hire this spring (28%), which is among the lowest Monitor readings in its history.

Small business owners are not taking this recession lying down. Many are finding new resources to tap and new ways to manage costs beyond the traditional steps of laying off staff or cutting back on staff hours. Nearly half of business owners (45%) are open to bartering for new products or services with customers or suppliers and nearly one-quarter (23%) report their barter activities have increased due to the economic environment.

Additional steps include:

• 48% have instituted hiring freezes
• 30% are no longer taking a salary
• 27% have a family member working pro bono
• 25% are renegotiating leases and supply contracts
• 16% have cut benefits
• 18% work a second job

Not all entrepreneurs view the current economic environment as a hardship; a distinct group (37%) says that the current economic environment actually creates opportunities for their business. Among these opportunistic business owners:

• two-thirds have a positive outlook on the economy
• half plan to make capital investments
• just over one-third plan to hire.

Nearly all of these glass-half-full entrepreneurs (92%) say that managing through the recession has made them a better business owner, compared to 77% overall.

From the Tax Foundation:

A new national survey commissioned by the Tax Foundation and conducted by Harris Interactive shows a majority of U.S. adults think that federal income taxes are "too high" (56 percent), while four in every five adults say the federal tax code is complex (85 percent) and say that the tax system needs to be completely overhauled (82 percent).

I wrote recently about the wonderful experience I had this spring teaching a new graduate seminar that explored how entrepreneurship shapes our economy, society and culture. 

What all of the students came away with is an understanding of the true complexity of the issues we face today.  The standard my party is better than your party debate and the bumper sticker solutions that seems to always lead us to just doesn't cut it in times like these.  They discovered how essential it is to dig deeper into the fundamental assumptions, the data we have on what works and what doesn't, and the longer term trends.

The Acton Institute has put together a powerful resource page that provides deep and thoughtful analysis of the current crisis and possible solutions.  It also dives into the moral and cultural issues that are so intertwined with any set of economic policies. 

Brew a fresh pot of coffee and explore some of the writings they are collecting at this site.

I have been hearing of an increase in the number of people selling their businesses over the past few months.  Financially strong companies and cash rich investors looking for good acquisitions are starting to move in the market.

Since it is a buyers' market right now, you need to set realistic expectations going into any discussions on selling your business.  From CNNMoney.com:

Of course, if you want to sell your company right now, expect it to fetch a lower price.

"Investment bankers say that valuations have dipped from a year ago by multiples of one-half to one point," [John] Brown, [president of Business Enterprise Institute] says. "So if businesses were selling for six times EBITDA [earnings before interest, taxes, depreciation and amortization], today it's five or 5½ times."

What I am hearing is about the same drop in earnings multiples -- about a one point drop.  However, most of the deals I have been seeing are running 3-4 times EBITDA, down from 4-5 times EBITDA a couple of years ago.

What does that mean?  Just like your home value, your business value has dropped 20-25% all things being equal.

But remember -- the other part of the valuation equation is the profitability of the business measured by EBITDA.  Most entrepreneurs have reported a significant drop in their profit margins over the past year.  So that means that the drop in value could become much greater than 20-25% if profits are also down.

My advice:

1. Understand what drives the value of your business.  It is most often some multiple of EBITDA.  The most common range historically has been 3-8 times.  What multiple you are likely to get is based on your projected growth, the health of your industry, the strength of your customer base into the future, and specific strategic advantages that you may be able to offer the buyer.  Currently, most multiples are 2-5 times EBITDA.
2. Know your number.  If you need a certain amount of money from your business to retire, have that number in mind going in.  If the market is not supporting that value right now, you might want to wait until it does.  Use that time to improve your EBITDA so that when the economy picks up you will have an even greater value.
3. Seek expert advice.  Work with your CPA and an attorney who specializes in Mergers and Acquisitions to understand the process and to help set realistic expectations.  You will have to invest some money up front, but it is money well spent.
4. Realize that deals change.  Once the buyer gets into due diligence the price may drop.  Once they learn more about your business they may lower their projections for what your business can do in the future.  Be prepared for this, and know how much you are willing to go down ahead of time.  Be ready to walk away if the price they are willing to pay drops too much.  Don't let your emotions lead you to take an overly discounted price -- buyers can smell desperation and will use that to their advantage by trying to drive down the price during due diligence.

The odds are that about one out of fifty inquiries about buying a business will lead to an actual closing.  Keep that in mind right up until the deal is closed.  I have seen more than one deal collapse at the closing table.  Keep a level head and don't spend the money until you actually have it in hand.  In fact, I recommend that you should not even dream about how you'll spend it until you get it.

The National Federation of Independent Business Index of Small Business Optimism fell 1.6 points in March to 81.0 (1986=100), making March the second-lowest reading in the 35-year history of the NFIB survey.  Two of the index components improved and eight declined, but nothing in the survey indicated a signal that the economy is improving.

Small business owners have yet to be impressed by some recent slightly encouraging economic news.  They remain skeptical, unwilling to commit to more spending or hiring until they see more customers in their stores.
 
The hard components of the index, those measuring owner spending and hiring plans, actually reached a survey record low.

"At this point, it is not clear that we have hit a quarterly bottom in the index, and we can only hope for a reversal and subsequent expansion led by the small business sector," said NFIB Chief Economist William Dunkelberg.  "There are signs that the economy is bottoming in the reports of sales, housing starts and auto purchases, but they were not strong enough in March to lift the spirits of small business owners."

Each year the Small Business and Entrepreneurship Council puts out its index of tax burden for each state in the US.  From their report:

You can find an interactive map here.

The top 10 this year includes:

1 South Dakota
2 Nevada
3 Wyoming
4 Washington
5 Texas
6 Florida
7 Alaska
8 Colorado
9 Alabama
10 Ohio

The worst ten states are (OK, DC is not officially a state, but it seems to be headed that way):

42 Massachusetts
43 Vermont
44 Rhode Island
45 Iowa
46 New York
47 California
48 Maine
49 Minnesota
50 New Jersey
51 Dist. of Columbia

Why does this matter?  Taxes, regulatory costs and property rights are the top three predictors of entrepreneurial activity within an economy.  Look for the bottom states to lag when the recovery begins to get in gear.

"Go global!  All businesses are global businesses."

This is what entrepreneurs have been hearing for the past decade.  While this still may be good advice, be prepared to meet additional regulatory challenges due to heightened enforcement of trade laws.

From Entrepreneur.com:

...[D]espite the rhetoric on the campaign trail, the Obama administration and the Democratic majority in Congress have recognized that remaining open to international trade is vital part to the effort to restore the health of the U.S. economy. But another thing that has become evident is that this openness has a price, and that price is enforcement.

The increased cost and inevitably confusion on regulatory compliance will diminish the drive for small business to go global.  This could be a serious damper on small business's ability to lead our recovery.

If you are a small business owner and sell or buy in the global marketplace, you probably need to have access to a lawyer who knows international trade law.  And be ready to add the increased cost of regulatory compliance into your expenses as they could become significant, particularly during the transition to this new policy.

Happy Tax Freedom Day! 

The good news -- Tax Freedom Day came a little earlier this year due to the recession and other factors.

The bad news -- When you add on the additional debt that is not paid with current tax revenues, the day you stop pay for government through taxes and your share of the government's IOUs won't come until the end of May!

Bloblive Nashville
April 15, 2009 (6:00 PM - 9:00 PM)
Belmont University, Nashville, TN
Beaman Student Life Center, Rooms A&B
Doors open and brain-food served at 6:00 PM
Idea sharing and live video streaming begins at 7:00 PM CST

Register for this event here.

While I was off the grid over the Easter weekend, my Sunday column about self-financing and bootstrapping ran at the Tennessean:

The thought of having to put your life savings, your home, or your retirement accounts at risk to launch a new business can send a chill down the spine of even the most committed entrepreneur.

And for the accidental entrepreneurs who have to start a business to make it through the current recession, it can create an almost paralyzing fear.

But self-funding is a part of the financing equation for almost every new business.

The base of self-funding comes from the entrepreneur's personal savings. When my partners and I started a health-care business in the 1980s, we had to rely on our savings to help us start the venture.

As the owners, we only received paychecks about half the time during the first two years. By having savings in place, we were able to maintain the lifestyle we had experienced before we launched the new venture.

Entrepreneurs come in all sorts of packages. Some new businesses need to be developed while the owner continues to work at another job.

If your business can be worked on during any time of day, find a day job that can pay the bills. Or, be prepared to take on an evening job, such as waiting tables or bartending, to help create a bridge until the new business brings in a steady income.

Of course, at some point the business will demand too much time to allow you to maintain two jobs. Hopefully, this will occur at a time when the new venture is able to pay you a regular salary.

Learn to pinch pennies

Banks generally do not lend money directly to startup businesses. However, you may be able to get a personal loan that you can use for the business. If you have enough equity in your home, you may be able to secure a second mortgage.

Another option is to put up property such as stocks that can serve as collateral to back a personal loan. Understand that such loans put your personal property at risk, if you default on the loan.

The most effective means you have to minimize the amount of cash you will need to put into a business is to find ways to bootstrap or shave dollars off your startup costs.

Bootstrapping can help reduce the time it takes to reach break-even in the business by reducing the overhead expenses you have to pay every month. That is why so many entrepreneurs start their businesses out of their kitchens, their garages or their basements.

Bootstrapping can also reduce operating costs, giving the owners more profit from each dollar of sales. The sooner you reach break-even and cover your basic expenses, the sooner you will have enough cash flow to pay yourself a salary and stop putting more of your own money into the business.

I will be going completely off the grid for the Easter break. 

See you next week!  Happy Easter!

My friend Bill Evans, President of Evans Glass here in Nashville, has stuck his big toe into the waters of blogging.  His industry group has started a blog at their website.  In his first entry, Bill takes on our current economic troubles:

The great majority of the news is reported negatively. Our economic crisis is reinforced by compounding negativity. The rare positive statements are followed by a grammatical conjunction and subsequent negative statement, i.e., "Durable good orders were up in February as compared to January, but down compared to last year." Forget the comparison to last year. Look at the positive that durable orders increased. Existing home sales are up and new home sales are up. Forget all statements that dilute these positive statements. I tell my sales and office employees to ignore anything that follows a "but" or "nor" conjunction.

He is convinced, and I agree, that our recovery is going to depend on Americans having a major attitude adjustment.  I think that it was President Reagan's positive and hopeful message when he took office that got the economy back on the right track so that his tax cuts could eventually do their job to move us ahead.

Yesterday ended up being a "bootstrapping" kind of day.

In my class during the day, Clint Smith, co-founder of Emma, talked to my students about his company and its growth.  He told my students that bootstrapping is best described as "you don't get it until you have to have it."  He went on to say that with that comes a trade-off.  "It takes longer to get out ahead of your growth."  So patience is a virtue that bootstrappers must have as they build their businesses.  Good advice!

Then last evening I met with a new group of local entrepreneurs, called Better Bootstrap,  who are getting together once a month to talk about all things bootstrapping.  This was their first meeting and about two dozen people showed up -- a great initial group.

The group heard from local entrepreneur, Ernie Clevenger, who co-founded a company called Care Here.  It has grown from a highly bootstrapped start-up into a very impressive operation.  Since they had no money during their launch, they had to find creative ways to bootstrap their company, which establishes in-house medical clinics for employers.  This is not the typical kind of business one might think of to bootstrap, but they did, and it has yielded remarkable results.

The group then shared some of their own bootstrapping challenges and got some useful feedback from their fellow entrepreneurs.

The Better Bootstrap group is something that I think could and should serve as a model for other communities.  Bootstrapping entrepreneurs, just like any business owners, need help, advice, and wise counsel.  The problem is that they often cannot afford to join typical business organizations.  This group charges no dues -- you just have to agree to try and buy a little food at the restaurant where they hold their meeting.

President Obama had proposed pumping billions of dollars of debt into small businesses across the US -- what I have predicted will likely create a small business bubble.

There is now some potentially good news out of Washington.  It seems that the banks that would lend these funds, with money coming from the Troubled Assets Relief Program that would be distributed through SBA loan programs, are saying the plan will not work.  From the Washington Post:

The conditions attached to the program, which require these financial firms to surrender ownership stakes to the government and limit executive pay, are so off-putting that these companies say they will not participate.

Industry officials and congressional sources said these issues were raised with the administration before the small-business initiative was unveiled. Nonetheless, administration officials accelerated the announcement, moving quickly to show they were using financial rescue funds to aid not only big Wall Street firms but Main Street businesses as well, sources familiar with the matter said.

What we have here is not just a simple expansion of the traditional SBA loan program, but yet another program that relies on heavy-handed government controls and questionable financial stewardship.

And what did Congress do the last time bankers balked on such a massive infusion of debt into a market?  They strong-armed bankers to join the sub-prime mortgage debacle -- or else.  Let's just hope that history does not repeat itself. 

Tim Jackson, Canadian entrepreneur and venture capitalist, offer his thoughts on our economic future in an interview by Gordon Pitts at ReportonBusiness.com.  Here is a sample of what he had to say:

So if you are laid off from your job and have a business idea, what do you do?

You beg, borrow, steal and you get it going - and you find a customer.

I know that sounds overly simplistic and there are certain companies where you need a venture-backed business because it will take three or four years to develop the technology. But traditionally, businesses have been started by designing something or creating a service or a product.

Then you went and sold it, and you used the revenue from the first customer to get your second customer and improve the product slightly. The revenue from the second customer was used to improve it again and you get the third customer.

We saw 300 companies last year [and funded two] and the vast majority should never have been looking for venture capital. Our advice is just go and start the company. Go and sell this. If you have something people will buy, they will partner with you and you can build a business.

Great advice not only for the accidental entrepreneur, but anyone starting a business.  Your goal is never to raise money -- it is to build a business.  If you are successful at that and eventually need funding, it will follow.

The NFIB announced their preliminary job creation findings from March, and see a slight glimmer of hope.  From William C. Dunkelberg, chief economist for the National Federation of Independent Business:

"March was another bad month for jobs, but maybe not quite as bad as February on Main Street. Seasonally adjusted, there was a decline in average employment per firm of .74 workers reported for the past three months by small business owners in March, large but down substantially from the loss of 1.0 employees per firm reported in February. 

 

"This suggests that the job loss trend is slowing. Six percent (down three points) of the owners increased employment by an average of 3.4 (up 0.8 workers) workers per firm over the past three months, but 28 percent (up four points) reduced employment an average of 4.3 workers (down 0.7 workers) per firm (seasonally adjusted). A mixed picture, but the net was that job loss per firm (including those who did not change employment) declined substantially. The private sector is very weak, with the only job growth likely to come from education, health care and government. 

 

"Ten percent (seasonally adjusted) reported unfilled job openings (down a point), and the percent of owners reporting that finding qualified labor was their top business problem fell to 3 percent - plenty of workers widely available as a result of the sharp contraction of employment that started in fourth quarter of 2008.

 

"Over the next three months, 12 percent plan to reduce employment (up two points), and 12 percent plan workforce increases (down 1 point), both numbers a bit worse than February."

 

However, Dunkelberg sees better times coming toward year end: 

"By year end, growth should be positive again, perhaps as strong as 4 percent (annual rate). Large pools of pent up demand are forming and will soon begin to be transformed into actual spending:

 

Here's why real growth will be strong by year end:

 

1. A massive "oil tax cut" of $400 billion if oil prices stay below $50 all year.

 

2. A few million more cars purchased. The current annual rate (9 million) is well below historical scrap rates (about 14 million cars a year).

 

3. A few hundred thousand more new homes started. Housing starts have picked up in 2009 and should continue to grow. The excess supply is in Florida, California, Las Vegas and Phoenix (where prices are 40 percent off of peak). The rest of the country will need to start building.

 

4. Small businesses have postponed capital outlays at 35 year record rates. The longer the recession, the larger the pent up need to make these outlays remains.

 

5. Small businesses have liquidated inventory at a 35 year record pace (and large firms have liquidated as well). This is another pool of pent up demand that will feed orders with a vengeance once owners see the economy bottom.

 

6. Even with 10 percent unemployment, 9 out of 10 people who want a job have a job and will start spending more on deferred but desired activities.

 

7. And finally, some stimulus from Washington."

Let's hope he's correct.

The progressivity of our income tax system not only snares the "rich corporate CEOs", but also many of the entrepreneurs trying to build their businesses.

The effective federal income tax rate faced by small businesses varies by the legal form of organization, according to a report issued yesterday by the Office of Advocacy of the U.S. Small Business Administration.  Average rates range from 13.3 percent for sole proprietorships, which are often the smallest of the small businesses, to 26.9 percent for S corporations.  The effective federal income tax rate is the actual amount of taxes paid by a firm as a percent of its net income.

Overall, small businesses of all types pay an estimated average effective tax rate of 19.8 percent.  Sole proprietorships face a 13.3 percent rate, small partnerships face 23.6 percent, and small S corporations face 26.9 percent. 

The progressivity of the tax code also affects effective rate calculations, as firms with less income face a lower statutory rate.  Nearly 60 percent of small sole proprietorships have a net income of less than $10,000, while only 3.1 percent have a net income of at least $100,000.  On the other hand, more than 18 percent of small S corporations have a net income of at least $100,000.

Most entrepreneurs spend years toiling away trying to get market traction.  Most put their own personal wealth into these ventures.  In fact, recent studies have found that over 85% of funding comes directly from the entrepreneur and his or her family.  At some point, if all goes well, the entrepreneur finally begins to make a profit and earn a living. 

And then just at the time that the entrepreneur begins to gain momentum and build a successful venture, the federal government swoops in and takes away much of the fruits of their success through a highly progressive tax code, that will soon become even more progressive.

The Kauffman Foundation has published the results from the economics blogger forum I participated in at their headquarters in Kansas City a few weeks ago.

Some of the highlights of the report:

• Two-thirds of the respondents reported that President Obama's top economic priority should be fixing banks
• 38 of the 39 respondents rated innovation as "very important" to the health of the U.S. economy
• 60 percent of respondents consider a continued credit freeze will be likely to cause a major slowdown in technological innovation
• 23 of the 39 respondents reported that government red tape is the biggest barrier to starting a new business
• The majority of respondents reported that keeping health benefits and lower and simpler taxes would encourage more people to start businesses in America
• Nearly 75 percent of respondents reported that small startup firms are very important to economic growth

You can read the survey and summary here.

I show my students a rather dated video from A&E called "IRS Horror Stories."  It recounts the Senate hearings about a decade ago that looked into IRS abuses of tax payers.  Many of the examples used in the documentary were small business owners.  While the video gets their attention, inevitably a student will say, "But that was ten years ago.  Surely things have gotten fixed by now."

Well, according to a 2008 Syracuse University study, the IRS has significantly increased audits of small businesses.  The study found that the smallest companies were 41% more likely to be audited in 2007 than in 2005, and companies with $10 to $50 million in assets were 29% more likely to be investigated. 

Ranking Member Graves of the House Small Business Committee noted the unfairness of this in his opening statement in a hearing yesterday. "Small firms are less able to hire high priced attorneys and accountants to fight back."

The Committee heard testimony from Douglas Shulman, Commissioner of the Internal Revenue Service (IRS) and Mr. Christopher Smith, owner of S.T.O.P -Northland, a small business near Kansas City, Missouri. 

The purpose of the hearing was to examine the cost of tax compliance for small businesses.  According to the most recent estimate I have seen from the SBA Office of Advocacy, the annual cost of compliance for a typical small business with 20 or fewer employees is $1304 per employee. 

Mr. Smith's story began in 2007 when he learned an employee had embezzled nearly $60,000 from his company.  After contact back and forth with the IRS, and uncovering mistakes by the IRS, an employee of Mr. Smith's was able to negotiate a reduction in his tax payment, although he believes he was then paying the tax for the third time.  "How on earth can an employee negotiate with an IRS agent the amount of a tax due when during an audit they ask specific questions to qualify you as the appropriate person to be liable?" asked Mr. Smith.  Mr. Smith stated that he has spent over 150 hours of his personal time solely to comply with the audit and will never be able to get over the losses.

Rep. Graves concluded by saying, "If small firms didn't have enough stress trying to run a small company in a recession, we burden them with countless laws, regulations, reporting requirements, and continue to do so every year.  We must simplify our tax code and require the IRS to do a better job of helping small businesses to comply.  Small businesses deserve better."

I have a better idea -- scrap the tax code and start over with a simple system that we keep insulated from political meddling.  While I favor a consumption tax like the Fair Tax, I will take any system that eliminates the 67,000 pages of the current tax code.  

The ADP Small Business Report released today shows that 284,000 small business jobs were lost in March. Declines in March and previous months indicate that the resiliency displayed by small businesses earlier in the recession is no longer apparent compared to medium- and large-sized enterprises.

The ADP Small Business Report is a subset of the ADP National Employment Report:

• Total small business employment: - 284,000
• Goods-producing sector: - 111,000 small business jobs
• Service-providing sector: - 173,000 small business jobs

Angel investors were just as active in 2008 when measured in terms of deal flow, but the money they pumped into these deals was down from the previous year according to the annual summary conducted by The Center for Venture Research at the University of New Hampshire.

Some additional findings from this report:

• 55,480 firms received angel investments in 2008, a 2.9% increase over 2007 -- as I have been telling folks, there is still money out there
• Dollar flow into these deals was down 24% from the previous year -- an indication of a more cautious stance by investors
• Healthcare and software led the way in deals -- no surprise here
• Exits in 2008 were mostly through mergers and acquisitions (70%).  26% of exits were through bankruptcy.  Only 4% of exits happened via an IPO -- thank you Sarbanes-Oxley for killing this as an option.
• Most of the angel deals were still seed stage or early start-up
• Yield rates for these angels were down to 10%.  Just as comparison the yield rate in 2005 was 23%.

Thanks to Jeffrey Sohl at UNH for putting this report together each year.