The Decline of Small Business.

Background.

Australia was built on small business starting from the convict days and the free settlers. Settlers were given parcels of land and made their way out in the bush. Some grew as farmers and others in small business and some provided the labour. It was Pareto at work in a pristine environment. 

As time went on and farms became more productive people migrated to the cities which were in the process of being built. Immigrants brought required skills and put them to work through the process of building small businesses.

This system worked well until the Whitlam government in the early 1970’s. Two things happened which lead to many small businesses being sold or closed down. The first was free University and the second was a massive increase in wages. Many years ago Noel Pearson said that if the government had wanted to destroy the indigenous culture it couldn’t have done a better job than when it gave the Aboriginals welfare and allowed them alcohol. Well the same was true for small business. Taking away a generation of school leavers and hiking wages for the rest along with the first major introduction of red tape resulted in many families that had built businesses selling them. 

Stage One

This was stage one of the eradication of small business, which went on for the next 10 years. The new University graduates took their academic theories and went to work for the consultants. Big business employed the consultants to evaluate small businesses. The consultants knew they could run the small businesses much more efficiently than the families that owned them. Big business was buying up small businesses making it much more efficient and then adding it to their stable. There were a number of problems:

1. The Consultants could never make the profits the families did.
2. The big companies would throw out the small supplies and consolidate their supply chains.
3. Overheads were built in many areas that used to be done around the kitchen table.

This process resulted in many small businesses being bought and incorporated into big business, 90% failed to meet the consultant’s expectations and were closed down. James Hardie, the name behind the names, came and went. And on the other side many small businesses were wiped out because the big businesses would only use big business as suppliers.

Stage Two

The next stage was a combination of the interest rates of the 1980’s and the ramping up of red tape. The British and the French were making an aircraft called the Concord. Given their inability to work together and the fact that the British were making the engines and the French the fuselage, how were they going to get them to fit together. Hence ISO 9000 was born. Within a few years many of the big companies and government demanded all suppliers had ISO 9000, which them blew out into the whole ISO 9000 series of quality standards. In the 80’s it cost $200,000 to get certification. That was OK for a Billion Dollar company but too much for many small businesses.

It was during this time that many red tape systems worked against small business. A good example is chemicals. A new chemical would be produced in Europe. If a small company in Australia wanted to use it they had to pay to get Australian Standards Certification. This was a minor expense for major corporations but a massive oncost for a small business.

Stage Three

During the later part of the 1980’s there was another major change happening that went largely unnoticed. In most cases small business owners just pulled out a living wage and left the profits in the business to build. These built in assets and in “goodwill”. In many ways goodwill was a measure of the value of the brand of the small business. However, by the end of the 80’s goodwill didn’t exist. The company was only worth a multiple of last year’s earnings. The problem was that many family owners had hung on too long waiting for kids or grandkids and then finding the kids wanted to go to Uni and become consultants with the flash life in the flash office, flying around the world having a great time not in the family business.

(As a Red Herring it should be noted this was the era from where the outsourcing culture was born. It started with a huge increase in white collar crime. Too many people were living in first class lounges and 5 star Hotels. Then they had to come home and mow the lawn and put the washing out. Many started to supplement their income so they could outsource those domestic chores.)

The result was that many families spent a lifetime building up a business or their retirement only to find that it wasn’t worth anything. There were ways around this. The obvious one was to work for a big company or the government. The salary was a lot more secure, the hours better and the conditions far superior. The next was for the business to build up a property portfolio starting with the building it used for the business. Families found it was much better owning property and collecting the rent rather than actually running the business. By this time profitability had decreased because of the extra overheads required to deal with the red, green and blue tape.

Stage Four

By the time we got to the turn of the century the traditional old family small business was virtually a thing of the past. The old small business required the children to work through their holidays and fill shifts during the week especially at night. But by the year 2000 children were locked up in their rooms immersed in youtubes or video games. And then of course they had to go the University after the required gap year. They were at least 23 before they were of any use.

The Re-birth of Small Business.

The digital age brought the re-birth of small business in two categories.

1. The start-up. You don’t need a lot of capital. You can work from home, or better still the parents’ home. The aim is to grab a market share and then sell the idea off the a larger company. If you are well connected you can drag in some venture capital to give you a leg up.
2. The Service Shop. This is getting harder and harder because of the level of capital required to get going. A simple kitchen is hard to fit out for under $500,000.

The problem is that 50% of new business doesn’t make the first twelve months and 50% of those do not make the next twelve months. Whether you are the digital start up or the service start up you will need capital. Wasting a year of income to achieve a dream is one thing but blowing a lot of capital at the same time is not pretty.

The Road Forward.

Robert Gottliebsen addressed the micro considerations in the Australian 18/6/20. But it is also the macro considerations that need to be addressed.

Small Business needs to be seen as a supplier to Government and Big Business.

More often than not local small business is a better supplier to large organisations in a specific geographical area in relation to Quality, cost and leadtime. However the larger organisations rarely have the ability to negotiate, accommodate, or communicate with small business. The barriers to entry in terms of certifications and standards need to be addressed.

Small Business needs to become marketable as a business.

This is partly a follow on from above, longterm contracts should have a value. The real problem is that people can no longer spend a lifetime building a business that has no value. In many cases people are just buying a job for themselves.

Small Business and The Economy.

At this point in time we must look at the value of a lot of these small businesses to the economy. The number one rule of the parallel university economics is that capital must be used to create the required return by creating wealth. Cafes create little wealth. They take hard earned money and use it to buy expensive kitchenware from overseas, coffee, a pint of milk and pay the landlord rent. The wages go in income tax, rent, imported consumer goods and alcohol. More importantly let’s go back to the hard earned cash.

Let’s look at the employee in the bubble that spends $30 per day on coffee and lunch $150 per week versus $50 it would cost to take from home. The difference is $100 per week or $5,200 per year. Over 30 years of working that would be $750,000 after tax. Imagine if that money had been invested in a company creating wealth. The lunch money could have built a wealth creating business and built a retirement package. However that money going into the service provider has built no wealth for the Nation just used the wealth.

Hence the problem is not just that many of these businesses are burning capital they are also depriving the Nation of the capital base required to rebuild a functioning economy.

I understand this sounds like a broken record but I seriously think we need to have another look at basic economics. I really enjoyed hearing Wolfgang Kasper, however I think we need o put Adam Smith and Keynes in their proper environment. Consumer spending worked in their time because of the multiplier effect. Capital needs to be mobilised into areas that create wealth.