Family Business in Decline?

Data from the Survey of Consumer Finances suggest that family-owned businesses are experiencing a decline. There appear to be as many households earning some income from proprietary businesses, but the proceeds from these businesses are falling. There are fewer businesses that earn a living wage, and the prevalence of high-earning proprietary businesses also seems to be falling.

Proportion of Households Earning Business Income

Consider the figure below, which shows the proportion of US households earning (1) any income, (2) at least a median income, and (3) at least a 90th percentile income from a proprietary business.

bizincearn

Between 8% and 10% of US households receive some business income, but between a two-thirds and three-quarters of these households fail to secure the equivalent of a median household income through personally-owned businesses. In 1992, about 3.3% of US households received at least a median household income from personally-owned businesses. By 2013, just over half as many households – 1.8% – received a median income from such businesses. The proportion of high-earning personal businesses has fallen even more sharply, from 1.3% in 1992 to 0.4% in 2013.

On one hand, these reduced earnings could be the byproduct of random variation. For example , business earnings took a bit of a dip in 1995 and 2004, but then recovered. This could be a product of sample variability or a natural minor fluctuation in small business profitability. However, that seems less likely when we look at the wider distribution of personal business earnings.

Distribution of Business Earnings

The figure below shows the distribution of business earnings from 1992 and 2013. It describes the 25th, 50th, 75th, 90th, and 95th percentile earnings from proprietary businesses.

incomedist

This figure shows a long-term decline in proprietary business earnings, which seems to have begun after the 2001 recession. In 2001, the median household business earned $26,664. This figure fell regularly through 2013, where the median stood at $16,400. This represents a fall of about 38%.

A similar decline occurred among the higher ranks of the business income scale. From 2001 to 2013, 75th percentile income fell from $79,200 to $40,000. Ninetieth percentile income fell from $217,800 to $87,000. Ninety-fifth percentile income from $370,920 to $156,600. These are staggering losses.

What Does It Mean?

If these figures accurately reflect changes in personal business earnings, it suggests that their earnings are falling quickly. Why might this be happening? It may be that small business faces mounting pressures from many quarters. Retailers may have increasing difficulty competing with big box stores and online retailers. Small manufacturing outfits may have trouble competing with foreigners. It might be that many small businesses are being replaced with automated substitutes (e.g., TurboTax and LegalZoom are killing small accountants and lawyers).

Whatever the cause, it seems quite clear that small businesses (at least unincorporated ones) are doing badly in the US.

Entrepreneurial Business Formation over Time

Entrepreneurs come to own their businesses in a variety of ways. Most small businesses are startups, in which the entrepreneur starts the business from scratch. Other businesses are bought. Some are inherited or received as gifts.

How to entrepreneurs come to own their businesses? The figure below, which is built from Survey of Consumer Finances data, summarizes how business owners report having come to own their enterprise:

entrepreneur-acquisition

Over time, the proportion of businesses that were acquired through purchase or gifts has declined as an overall proportion of businesses. In 1989, about 25% of enterpreneurial enterprises were acquired through purchase, and another 9% or so were received as gifts or inheritances. About 64% had been started by the entrepreneur operating the business.

The proportions appear to have been changing slowly but steadily over the past several years. By 2013, the proportion of bought businesses fell by half to about 13%. Given businesses stood at about 5%, roughly the range in which they stood since the early 1990s. In contrast, over three-quarters (76%) of enterpreneurial enterprises were started by their owners.

The striking decline in purchased businesses suggests that the secondary market for owned businesses is shrinking. Perhaps today’s small businesses are much more likely to close up shop than be sold off. The marketplace may be more competitive, and businesses might not be as profitable and thus valuable on secondary markets, so more entrepreneurs may simply opt to close up rather than sell their businesses to someone else.

The small proportion of businesses that have been acquired as gifts, including inheritances is striking. Small enterprise are rarely a vehicle for maintaining familial economic dynasties – most businesses live and die by the entrepreneur that started them. Of course, a successful small business may put an entrepreneur in a position to set up future generations, but these seem to be more the exception than the rule. About 5% of all entrepreneurial enterprises – less than 1% of society – operates a business that they did not build or buy.

These figures suggest that most business people live off of enterprises that they created and nurtured. Inherited businesses are not very commonplace, and the secondary market for businesses seems to be drying up over the long-term.