Definition of "Small"?

The cover story in this month’s Forbes magazine showcases “America’s Best Small Companies in 2010” in the United States. I find it very encouraging that one of the major business magazines has generously decided to give so much space to the little guy.

After all, 75% of the businesses in the United States employ fewer than 10 people. That means that the overwhelming number of businesses in the US (around 4.5 million companies) finally gets a hearing. Any politician will tell you that they form the backbone of American business. The Ewing Marion Kauffman Foundation said, in a 2009 report (“Where Will the Jobs Come From” November 2009), that “…firms between the ages of one and five create the most net new jobs, dwarfing the other age classes. These firms also create the highest average number of jobs: roughly four jobs per year.

They concluded that “Still, virtually all of the attention among policymakers and the media has focused on the waiting game by larger firms, currently reluctant to take back employees they dismissed, and unwilling so far to begin hiring new employees again. The analysis here, however, suggests this attention is misplaced. The overwhelming source of new jobs is new firms. The key implication for policymakers concerned about restarting America’s job engine, therefore, is to begin paying more attention to removing roadblocks to entrepreneurs who will lead us out of our current (well-founded) pessimism about jobs and sustain economic expansion over the longer run. This much-needed shift in focus cannot come soon enough.”

So, thank you Forbes for exposing this problem so prominently.

What’s that you say? What were Forbes’ criteria for identifying these small companies?

Let me look…hmmm. Hey wait a minute. Could it be?

They looked for companies that were publicly traded for at least 2 years, had a stock price over $5, and had gross revenues less than $1 billion. There must be some disconnect here. I thought we were talking about SMALL companies.

Are we all on the same planet? Apparently not. The policymakers and the media, to which the Kauffmann report referred, love to play the “small business” card at their convenience. They rely on the fact that what the public defines as “small” is never compared to what they define as “small”. By bringing small companies into the conversation, they kill two birds with one stone: they mislead the public into thinking they’re talking about Main Street and, they tout programs that do nothing for the real small businesses but take credit for thinking of the “little” guy.

In fact, the Small Business Administration’s definition of small is 500 employees or less and covers about 1.483 million out of 6 million employers or 25%. That leaves the balance of employees with over 500 employees:

1-9 employees 4.500 million
10-499 1.483
500+ .017

Yes folks, 17,000 companies in this country employ greater than 500 employees. So, when a magazine like Forbes wants to sell magazines, their target market is only interested in 1.5 million employers…the ones who do not create permanent jobs.
Here’s a comment the Forbes article received from a reader:

“If they were to write an article on small businesses with 20 or less employees, how many of those companies would be publicly traded? As an investor, why would I care about companies that are not publicly traded? Now, if they wrote an article about small companies (regardless of headcount) that would be going through an IPO, then I would definitely be interested in reading that article.” (Posted by jimgzz | 10/28/10 03:13 PM EDT)

Just like most of our brilliant financial gurus, this guy simply doesn’t get it. With most of the companies that provide jobs being totally ignored (if not ridiculed) he actually thinks that everything will just go along it’s merry way, just like old times. It’s shortsighted attitudes like his that started this mess in the first place.

But, encouragingly, here’s another comment:

“Forbes obviously has a completely different definition of a "small" company. According to the US Census Bureau, Two-thirds of all US businesses have less than 10 employees.

In fact each of the "Small" businesses featured fit in the top 0.5% of US businesses. How does this even closely reflect the real US economy? How about an article about the top 20 best US "true" small businesses under 20 employees. Then we will finally have an article that reflects and inspires the real US Small Business market.” (Posted by jbmetrics | 10/27/10 05:11 AM EDT)

Thank you “jbmetrics” whoever you are.