are always very formidable, and an obligatory and totally structured loan repayment schedule can often be a fatal
factor. Thus, although obviously more difficult to fund, a self-employment development program which includes equity
support rather than credit support is more likely to create a greater number of successful new start-up businesses. The
issue of program funding then becomes a critical one.
A number of European countries have met this challenge by instituting "transfer payment diversion" programs.(9)
These programs all in some manner allow the government to pay out unemployment benefits in single lump sums to
qualified displaced workers who wish to start their own businesses. The first of these programs, France's Chomeurs
Cr‚ateurs, was instituted in 1979, and Britain's Enterprise Allowance Scheme followed in 1983. Over 700,000 persons
have participated in these two programs to date, and some seventeen other countries have instituted similar programs
Working within the existing unemployment benefits programs, these equity support programs generally require the
prospective small business owner to develop a business plan and in other ways show that he or she has a real chance for
success in the proposed venture. In most programs, the entire amount of unemployment benefits that would normally
be paid out over the maximum allowable period of time is paid out in one lump sum, specifically for use to start a new
business. In some countries the displaced worker receives the money as soon as the business plan has been approved,
while in other countries the business must be started (with personal funds or borrowing) before the government
transfers the entitled funds. Most programs also provide management assistance, training, workshops, etc. in
conjunction with the equity support.
Most of the businesses resulting from these programs are home-based microenterprises, but about ten percent turn into
real growth businesses. One set of data indicates that for every one hundred businesses started, about 130 new jobs
have been created. As more of these programs reach a maturity stage, hopefully these data will become more concrete.
However, it is important to recognize that all of these transfer payment diversion programs overcome the funding issues
raised earlier in this paper by simply diverting funds already available and to which the
recipients are already entitled. Thus, there is less political or practical opposition to these programs.
The Washington State Program
While most equity support programs involving transfer payment diversion are found outside the United States, one
program recently initiated in the state of Washington is worthy of an in-depth analysis (10). Modeled after the
European programs, Washington's version is being run on a limited one-year trial basis. One thousand laid off workers
are receiving a lump sum payment of their unemployment benefits, averaging $4,100. As in Europe, the program is for
only a small percentage of all unemployed people. In selected trial cities, all newly unemployed persons are advised of
this new program. About five percent of those notified indicate any interest and perhaps three percent actually complete
initial applications for the program. Candidates are then required to take a four day, 20-hour series of business classes,
perform market research, and then develop a detailed business plan (including financials) that is acceptable to a
counselor. Since these people are already receiving their weekly unemployment benefits during this period, there is
pressure upon them to complete this portion of the program quickly so as to leave as much of their total benefits
available for the lump sum payment. Upon final qualification, the displaced worker receives the full payment and is
assisted in the business start-up and subsequent operations by a personal business counselor from the program.
As of mid-August 1990, 477 people had enrolled in the program and 178 businesses have actually been started. Only
three of these businesses have employees other than the proprietor.
Our analysis of these various self-employment development programs, and a subsequent series of personal interviews
with directors of both the Washington State and other programs, have led us to develop a number of conclusions
regarding those factors that are likely to lead to the success of these equity support programs, and to the success of
other types of self-employment development programs as well. (11)
* The "open admissions" policies of most of the European programs indicate that there is more small business
ownership potential in a wider range of the population than previously thought.
* Early intervention is very important. The program must quickly recruit, screen, and select participants as soon as
possible after their being laid off.
* It is important to focus the initial part of the program on confidence building. Many people in these programs are
middle aged and are scared of the prospect of starting out on their own,
usually for the first time.
* It is preferable to steer the clients toward business proposals which make use of skills which they already possess,
often based on the jobs from which they were laid off.
* All unemployed people should be made aware of these programs. Since only a very small percentage reach the actual
assistance programs, the greater the initial applicant pool the better the quality and chances for success of the final
* For transfer payment diversion programs, since the amount of the lump sum payment is limited by the traditional
stream of unemployment benefits, it is important to run the program quickly, leaving the lump sum payment as large as
possible. Since the total lump sum tends to be small (Washington average = $4,100) relative to the startup needs of
even a microenterprise, every extra dollar can make a difference toward the chances of success.
* Support groups are of value. In Seattle an Entrepreneurs Club of program participants has been established, holds
monthly meetings, has published a membership directory, and provides a network for these budding business people.
* Success rates in these programs seem to be higher for those participants who are older, male and married, who have
had more recent and higher levels of work experience, and who have more of their own funds to invest in the new
business venture. Yet success is also attained by persons who do not meet these profiles.
* Recent federal legislation requiring most larger companies to provide advance notice of plant closings should allow
self-employment programs to intervene and assist even before a person is actually laid off.
* The most successful programs provide a continuum of self - employment development and support services. They
start with a speedy but rigorous client selection process and follow up with a full range of flexible, client-responsive,
and business-oriented assistance. These programs continue to serve the clients after they start their businesses.
Although previous research has shown that displaced workers tend to have below average entrepreneurial propensity,
self-employment is still a viable option for these persons. Self-employment development programs can be effective and
successful in this context if we recognize that micro-enterprise ownership rather than entrepreneurship or growth
business ownership is a more appropriate goal and path for displaced workers who can not find new employment.
While self-employment development programs that do not include credit or equity support can assist people in
initiating small business ownership, those which do include such support have a greater chance of succeeding.
Furthermore, equity support is preferably to credit support, and the transfer payment diversion model can overcome the
funding problems inherent in other equity support models.
Analysis of a wide variety of self-employment development programs leads to a series of conclusions regarding
program success factors, and these have been presented above. Clearly the concept of self employment development
should be pursued in the context of displaced workers, and greater emphasis should be placed on the inclusion of credit
and equity support components in such programs.
1.Sonfield, Matthew C. , Robert J. Barbato and Jeffrey S. Bracker, "Worker Dislocation and Potential
Entrepreneurship," Journal of Business and Entrepreneurship, forthcoming.
2.Friedman, Robert, "On the Economic Significance of Self- Employment," in Gaining Momentum. Expanding
Opportunities (Don Mills, Ontario: Self-Employment Development Initiatives, 1989), pp. 2-5.
3.Feit, Rona, "Supporting and Servicing Programs- Questions of Capacity and Demand, to in Gaining Momentum.
Expanding Opportunities. (Don Mills, Ontario: Self-Employment Development Initiatives, 1989), pp. 8-14.
4.The Self-Employment Strategy: Building The New Economy (Don Mills, Ontario: Self-Employment Development
Initiatives, 1989), pp. 5-8. Also: Sonfield, Matthew C., "Macro and Micro Impacts of Black-Owned Franchise Units,"
Proceedings of the 1990 Annual Eastern Conference of the Small Business Institute Directors Association, Scranton,
PA, September 1990.
5.Feit, op. cit.
6.Herz, Diane, "Worker Displacement in a Period of Rapid Job Expansion: 1983-87," Monthly Labor Review, May
1990, pp. 21-33.
7.The Self-Employment Strategy, pp. 12.
8.Reit, Rona, "The U.S. Experience," in Gaining Momentum Expanding Opportunities. (Don Mills, Ontario: Self-
Employment Development Initiatives, 1989), pp.35-40.
9.Brooks, Chris, "Lessons From Europe," in Gaining Momentum. Expanding Opportunities. (Don Mills, Ontario: Self-
Employment Development Initiatives, 1989), pp. 16-20.
10.Kilborn, Peter, "Novel Program for the Jobless Aims to Create Entrepreneurs," The New York Times, May 16,
1990, p. Al.
11.Telephone interviews with Cathy Countryman, Washington State Director of Research Projects; Clare Phillips,
Washington State Department of Trade and Economic Development; and Peter Nares, Ontario Social Development
TENURE IN THE YELLOW PAGES
Eugene L. O'Connor California Polytechnic State University San Luis Obispo
How many small businesses fail and in what time frame? Numbers like 50% in five years, 50% in one year, 90% in five
years, etc. are quoted in press releases, textbooks and speeches. Alpander, et al quote Siropolis "Approximately 55
percent of all new ventures fail during the first three years".(1) This paper tries to find out what the approximate tenure
is for 83 Standard Industrial Classification Codes. The study is of businesses in San Luis Obispo County, California.
The length of time for the study was nine years.
INTRODUCTION & METHODOLOGY
The population of San Luis Obispo County is about 214,000, with an increase of about 30,000 from 1979 to 1988. Its
major industries are government, agriculture and tourism. San Luis Obispo is the largest city and the county seat. A
nearby university increased from 14,000 to 17,000 students during the period studied.
The city has increased in population from 35,000 to 40,000 during the same period. One of two major north-south
California highways bisects the city and the county. Two major tourist attractions, a California mission and Hearst
Castle are in the county. Most of the businesses in the county are retailers, service firms and government entities.
During the period 1980-88, the unemployment rate ranged from 3.2% to 4.8% in the county.
The author's rationale for the study was prompted by the apparent high turnover of retail firms in San Luis - Obispo
city. Shapero determined the tenure of small firms using a count of businesses entering and exiting the Yellow pages.
(2) This study tries to approximate the same methodology. The reason for using the Yellow Pages is the belief that
listed businesses are serious about being in business. The Yellow Pages declined to participate in the study citing
privacy records. Using telephone directories for the years 1979-1989, a count of new businesses came by noting new
names in each annual directory.
Exits counted if prior names did not appear in the new directory. Firms that had been in business before the years
studied counted as exits if they exited later. National chain outlets were not considered but franchises were if the
owners were franchisees. The study did not include farms.
SIC code selection was upon the author's knowledge of the community. Professionals such as attorneys or dentists are
not included in the count. Where it was known, transfer of ownership without changing the name of the business
counted as continuing firms. If the firm changed owners and changed the major activity of the business, the firm was
counted as a new business.
The number of years in business was a function of a firm's entry into, or deletion from, a directory. Tenure was in
whole years regardless of starting or closure dates.
Some businesses do not list by choice. Some home businesses do not list their phone as a business phone. Other
businesses miss the deadline for listing. Some return sporadically because they are not certain of the effectiveness of
Other limitations are multiple listings for the same firm forcing guesses about the major emphasis of the business.
Scrambled merchandising is very common, particularly in smaller communities. Other firms employ the tactic because
the original thrust of the business, or the target market, has changed.
The author screened all citations to try to cull out as many duplications, wrong classifications, etc. as possible. The
original sample size of 3,308 firms and the consistency of findings shows that the limitations are not serious problems.
Listings in the 1980 directory that were not in the 1979 directory counted as new businesses. San Luis Obispo County
retailers and service firms dominate the business economy. Listings in the 1979 directory that were not in the 1980, or
later, directories counted as closures. Each annual directory followed the same procedure.
1,056 (39%) firms of 2,711 continued operations during the period.(Fig. 1) 1,655 closed their doors over the same
period. Attrition rates were slightly lower for the first three years of operations totaling 49.1% (Fig. 2) compared to the
55% mentioned earlier.
Figure 3 shows the percentage of firms that continued after starting in the years 1980-89. After the fifth year, there is a
pattern of about 27% continuing in business. Continuance of these firms may occur barring death, illness or large
national or regional companies moving into the area. In fact, two large department stores have entered the San Luis
Obispo County trading area. Two more have extended into the extended area. There is likely to be a higher attrition rate
among woman's clothing stores and other specialty shops.
The most active industries for new starts were restaurants (all dining establishments), beauty salons (hair cutting, hair
styling and nail care) and antique dealers. The attrition rate for these three industries was 63.1%, 53.2% and 70.8%
The retention rate by years of operation for restaurants is shown in Table 4. Eating establishments varied from fast food
to elegant restaurants. The number of new starts was nearly twice that of beauty salons. An expanding population could
account for some of the activity but not the bulk of it. The author estimates that about fifteen restaurants, as opposed to
fast food places and pizza parlors, dominate the market. National franchises/chains dominate the fast food market.
About half of the beauty salons went out of business over the period examined.(Fig. 5) There are very few of these
firms with more than four employees in the county. Scrambled merchandising tactics grew during the period as firms
added nail care and tanning facilities to their service offerings.
Firms closed before 1980 in nearly the same proportion in various industries as did those that started after 1979 and
Table I lists industries with an attrition rate over 50%. The first half of the table lists firms that have ease of entry. The
high turnover of these kinds of businesses produces lower priced equipment for resale. Antique dealers take items on
consignment. Some firms need little more than a telephone and a post office box.
The second half of Table 1 lists industries where inventory and equipment needs are large but financing may be
available using second mortgages.
The local university is polytechnic in nature and encompasses architecture, civil engineering, agriculture, printing,
computer science and business majors along with many others. Graduates and students in the majors listed above try to
apply their knowledge to a business. This is particularly true where little capital is necessary and there is a strong desire
to stay in the county.
The area is seen as a very desirable place to live. Many graduates, ex-students and others from out of the area have
made a commitment to living in the area. To make a living, many people start their own businesses. The area has
traditionally had a low unemployment rate and a surplus of student labor. Industries with ease of entry attributes attract
the people mentioned above. In the author's opinion, this is the reason for so many new businesses such as gardening,
auto detailing and computer retailers.
Birch, quoted in Bates & Nucci, speaks of "a foundation of massive, continual failures".(3) The term "failures" is
interpreted to mean failure to stay in business, whatever the reason. Bates & Nucci call these failures "a great
volatility". They maintain that businesses with five and over employees closed at an annual rate of less than 3%. They
claim that many discontinuances occur among firms with small gross sales (4) and they argue that new and younger
firms with a small group of employees account for most of the discontinuances or "failures".(5) Perhaps this is the
reason for such a high attrition rate in San Luis Obispo County.
No information about numbers of employees per firm was available. The author's knowledge of some firms suggests
that the bulk of the firms had, at most, three or four employees.
Brockway & Mangold argue "Assessing the economic health of a market area is the first step in identifying retail
market opportunities for small business."(6) The author's personal experiences with many small businesses in the
county found that few new businesses do a market analysis. Fewer yet make a business plan. This is perhaps another
reason for the many business "failures" in the county.
In some instances, the entrepreneur is unaware of the long hours, hard work, and pressure placed upon them. This may
happen despite their experience in the industry as an employee. In all probability, closure will happen if they have no
experience in the field.
The number of "failures" in San Luis Obispo County, shows a high attrition rate among thirty-one of the industries
studied. The rate for all industries was also high. High is defined as greater than 50%. However, not enough is known
about number of employees nor total sales per closed firm. The county is a unique macroeconomic entity in a rural
setting. similar findings may occur among some of the several industries in other areas.
The findings raise more questions than answers. Is there a causal effect between the higher attrition rate of an industry
and higher interest rates for bank loans to long established firms? Does the rate intensify reluctance on the part of
financiers and potential investors?
Lack of a market analysis, lack of a business plan, lack of business expertise and/or insufficient starting capital are
commonly thought to be major factors in business failures. If the findings of Bates and Nucci are accepted, should that
group of would-be entrepreneurs who are likely to "fail" be assisted and how should this be accomplished?
SBI's can be one part of the answer. There is a market for educating would-be entrepreneurs before they start a
REFERENCES (1) Alpander, G. G., K. D. Carter and R. A. Forsgren, "Managerial Issues and Problem Solving - The
Formative Years". Journal of Small Business Management, April 1990 p. 9.
(2) Conversation with Al Shapero, SBIDA National Conference, New Orleans, February, 1981.
(3) David L. Birch as quoted in Bates, Timothy & Alfred Nucci. "An Analysis of Small Business Size and Rate of
Discontinuance," Journal of Small Business Management, October 1989, p. 1.
(4) Ibid., p. 2-3.
(5) Ibid., p. 6
(6) Brockway, Gary and W. Glynn Mangold, "The Sales Conversion Index: A Method for Analyzing Small Business
Market opportunities", Journal of Small Business Management, April 1988, p. 46.
INDUSTRIES WITH THE HIGHEST ATTRITION RATES THAT HAVE SMALL CAPITAL REQUIREMENTS
NO. OF ATTRITION CODE INDUSTRY STARTS RATE 7531B AUTO BODY REPAIR 55 92.7% 5521B AUTO
DETAILING 38 84.2 7349A JANITORIAL SERVICE 54 79.6 8349* HOUSE CLEANING 28 78.6 5816A
CATERING SERVICE 41 78.0 5999V ANSWERING BUREAUS 43 74.4 7393C SECURITY GUARDS 22 72.7
5913A ANTIQUE DEALERS 106 70.8 0782* GARDENERS 88 68.2 5039S FENCE CONTRACTORS 24 66.7 7692*
WELDING 65 63.1 2434* CABINET MAKERS 78 62.8 7342D PEST CONTROL 26 57.7 7231B BEAUTY
SALONS 205 53.2 2293* UPHOLSTERERS 32 53.1 15 SICC's TOTAL STARTS 905 33.4% OF ALL STARTS
INDUSTRIES WITH THE HIGHEST ATTRITION RATES WITH LARGER CAPITAL REQUIREMENTS
THAT MAY BE FINANCED
NO. OF ATTRITION CODE INDUSTRY STARTS RATE 3639* APPLIANCES-HOUSEHOLD-MAJOR 49 79.6%
5945A ARTS & CRAFTS SUPPLIES-RETAIL 24 75.0 5521B AUTO DEALERS-USED CARS 44 75.0 5734B
COMPUTER-DEALERS 43 74.4 5911* SPORTING GOODS-DEALERS 29 72.4 5661* SHOE-RETAIL 36 72.2
5941A BICYCLES-DEALERS 21 66.7 5712* FURNITURE DEALERS-NEW 57 64.9 5814A RESTAURANTS 406
63.1 7999A ART GALLERIES-DEALERS 74 60.8 5992* FLORISTS 55 60.0 5161* NURSERIES-RETAIL 39 59.0
5944* JEWELERS-RETAIL 52 57.7 5713A CARPET & RUG-DEALERS-NEW 46 56.7 7212*
CLEANERS/LAUNDRIES 25 56.0 5643* BAKERIES/DOUGHNUTS 47 51.1
16 SIC codes TOTAL FIRMS 1047 31 OF 63 SICC's 38.6% OF ALL STARTS 49.2% OF TOTAL SICC's 72.0% OF
WHO HELPS THE ENTREPRENEUR: THE EFFICACY OF THE SBI
Lloyd J. F. Southern, Mercer University Robert G. Schwartz, Mercer University
Measures of economic development generally are not utilized to calculate the contribution of the Small Business
Institute (SBI) program to the economy. The objective of this study was to quantify the SBI's role in providing an
economic return for the federal and state support provided to this SBA program.
SMALL BUSINESS INSTITUTE
The SBI program was begun in 1972 to provide a formal university/industry interface. A number of studies of the SBI
have been done but these have been descriptive in nature, lending little to knowledge regarding the economic impact of
It was not until 1983 that a major national evaluation study was published (Solomon and Weaver, 1983). This study
indicated that client firms achieved some increases over non-clients in their various financial ratios, but no statistics
were offered. From 1983 to 1990 no papers were found which dealt with the subject of the economic efficacy of the
SBI program. In 1990 Lorette et. al. were calling for the restructuring of the SBA to cure the purported support of
The objective of this study was to quantify the SBI's role in providing a financial return for the federal and state support
provided to this SBA program.
The Sample Frame
The sample frame consisted of the 250 (of 500) randomly selected SBIs listed in the current SBA list of SBIs (1989)
representing the United States, Guam, and Puerto Rico. All 250 SBIs were mailed individual signed letters and surveys.
A questionnaire was developed which sought descriptive data relative to the demographics of the SBI, its director and
its clients; including sources of new clients; types of businesses served, screening of potential clients, success and
failure data for clients, and economic impact of the SBI on the local economy.
Forty-six or 18.4% of the 250 responded to the questionnaire, represent 20 states. Twenty-one of the respondent SBIs
were located near or in a city of less than 50,000 population, eight less than 250,000, five less than 500,000, three less
than one million, six over one million, and three failed to provide the information.
The demographics of the respondent SBIs are shown in Table I.
TABLE I DEMOGRAPHICS OF RESPONDENT SBIs (n=46)
Mean Year Opened Location 80.5
Total SBI Cases (1989) 12.6
Total SBI Cases (1990) 14.7
Type of Client Served
The types and number of firms that have been served by the respondents are indicated in Table II. Service, retail, and
manufacturing appear to be the firm types most frequently assisted. The nature of the jobs created should also be
reflective of these firm types.
TABLE II TYPE OF CLIENTS PRESENTLY SERVED
(n=46) Respondents Mean Retail 33 5.0 Service 38 4.2 Distribution 7 3.4 Manufacturing 27 2.3 Low Technology 15
1.5 R&D 3 1.6 Moderate Tech 12 1.2 R&D 3 1.6 High Technology 7 0.9
Specific Industries Served
The SBI's were also asked to indicate the predominant type of firm served in each category. A large number of
responses were provided, which were extremely diverse, likely reflecting both the nature of the local economy and the
inherent diversity of business.
Respondents were asked to provide information relating to the impact of the SBI on the local economy's business and
jobs created, diversification of the economy, change in patent estates, and number of minorities, female and
handicapped run businesses helped.
Table III reports the number of businesses and jobs created.
TABLE III LONG TERM RESULTS (n=46)
Since Inception of SBI: Mean Resp. New Businesses Created 24.1 23 New Jobs Created 101.0 19 Diversification of
Local Economy 3.5 18
(On a scale of 1-10, where 10 is a completely new economy)
The respondents were asked about the number of patents applied for and received by clients (Table IV).
PATENTS ESTATES OF SBI CLIENTS (n=46)
Inventions Mean Resp. Disclosed 9.1 15 Patents Applied 4.4 14 Patents Received 2.3 14
Information was collected regarding the number of minority, female, and handicapped run businesses (Table V).
TABLE V SBI CLIENT DEMOGRAPHICS
Since Program Began Mean Resp. Minority Run Businesses 8.6 20 Female Run Businesses 14.4 23 Handicapped Run
Businesses 2.7 18
An attempt was made to determine what relationships existed among a number of variables.
SBI Age and Business and Job Creation
Should older SBIs have been responsible for creating more businesses and jobs, ie. do these variables co-vary with age?
Older SBIs were found to produce more business (sign. 0.002) and more jobs than their younger counterparts (sign. =
0.001). This result is different than that found in companion SBDC and business incubator studies, ie. older programs
were found to be less productive in terms of creating businesses and jobs (Schwartz et. al, 1990; Southern and
Schwartz, 1990). This may be the result of the SBIs being more selective in terms of clients and more productive in the
use of their time.
SBI Location and Business and Job Creation
Perhaps urban SBI programs created more jobs than their rural counterparts. Rural SBI programs accounted for less
new business created (sign. 0.078), but the rural locations were newer (sign. 0.105). Urban locations also accounted for
greater numbers of jobs created, but the relationship was weak (sign. =0.114).
Impacts of the SBI program on the economy could not be calculated due to the low response rate to the questions
related to economic issues. Thus, while almost twenty years old, the SBIs do not track return dollars in the same way
their client firms do. Business incubators appear to be somewhat more accountable (Schwartz, et. al, 1990). However,
the SBI program appears to be more productive in terms of age and firms and jobs produced than their SBDC and
The effectiveness of the SBI program relating to the creation of patents and the assistance to female, minority, and
handicapped run business is unknown.
References are available upon request to the authors.
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