Can Small Business Survive Federal Regulation?

It has always been tough to start a business, but as Niall Ferguson points out in his excellent article “How America Lost Its Way” in the Wall Street Journal, it’s getting tougher. According to an annual survey by the World Bank, in only 20 countries has the red tape to start a business increased since 2006. The sixth-worst such case on earth? The United States, where the regulatory process is now calculated at 433 days. That puts us in competitive company like Zimbabwe, Burundi and Yemen.

It’s also tough to write a piece about business regulation without it sounding like a political rant. That’s not my intention. Laissez-faire economics has its drawbacks, and there are certainly issues of fair trade and public safety that fall to the Federal Government, which is tasked directly by the Constitution with regulating interstate trade.

There are two developments that came to my attention last week that scare me, however.

First, the Equal Employment Opportunity Commission (EEOC) has filed Federal lawsuits against BMW of North America and Dollar General Stores. The claim is that they unnecessarily check criminal records of those applying for employment. Unless they can prove that something about the job creates legitimate concern regarding prior criminal activity, this is illegal.

business criminalTheir argument rests not on the overall fairness to criminals however. Thankfully, they do not yet claim that criminals as a group should be a protected class. Instead, the suit points out that since African-Americans have proportionately higher conviction rate than other ethnicities, using criminal records as a hiring disqualifier is de facto racial discrimination.

Put aside for the moment the government’s implied position regarding racial bias in the justice system. That isn’t an employer’s fault, nor is it his responsibility. Discrimination is favorable treatment of one class of workers against another. Don’t law-abiding employees have the right not to work with criminals every day?

Federal law widely recognizes that those convicted of a crime lose certain rights. They are confined against their will. They have to report their whereabouts, at least while on probation. They can’t vote. They can’t buy guns. They carry a record for life. That is all part of the punishment for committing a crime. Reducing job opportunities isn’t discrimination against a race, it’s discrimination against criminals – which is pretty much the point of the whole system. Why should employers be denied the rights that the government gives to itself and everyone else? That sounds like discrimination to me.

The second regulatory issue isn’t new, but businesses are just becoming aware of it. Large sections of the Soviet-named “Affordable Healthcare Act” (no one on the planet claims it makes health care more affordable), are due for implementation on January 1, 2014. According to multiple industry and government surveys, thousand of service industry employers are preparing to reduce the hours of many employees below the 30 per week that triggers eligibility for coverage in preparation.

Now we are becoming aware of the “Retaliation clause” of the ACA. It confers “whistle-blower” status on  those who claim their hours were reduced to avoid paying for health care coverage. Such status gives the whistle-blower a substantial cut of any damages, lets the government pay the litigation costs, and can result in the tripling of any award for what will now be a criminal activity.

I realize that there is no regulation protecting the right of a business owner to make a profit. There is no law saying that shareholders can’t have their investments destroyed by regulatory confiscation (we’ll decide what you spend – you just pay it) in support of social policy. There is no statute that says, as Ayn Rand did, that the pursuit of financial success should be protected as long as it doesn’t harm anyone else.

But there should be.

On the bright side, at least those employers driven out of business by ACA convictions should be able to get a job…

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2 Responses to Can Small Business Survive Federal Regulation?

  1. Jeff Ostroff says:

    Totally agree with the criminal background check. not just a right but practically a necessity. who would want to hire an embezzler to be your accountant, right? we get to check everything else on a resume’ or application, but not whether they broke the law? By the time an employer does the background check they have already passed the point of a judgement based on color, race, etc if in fact they were narrow minded enough to allow that to enter into their hiring decision.

    Disagree on healthcare. everyone deserves it and while the current law sucks it was the best our representatives could come up with considering their primary objective is always political, not about the people they represent. A lot of great ideas were shot down based solely on rhetoric, unsupported assumptions and lies as facts. (BTW, i pay 90% of my employees’ healthcare)

    • John F. Dini says:

      Good for you, Jeff. I also pay the cost of my full time employees’ health insurance. I’ve been to countries where there is nothing provided for the poor, and they aren’t places I would choose to live. My problem is with criminalizing an employer’s decision to contain expenses (pointing out that the law includes provisions to cover those who don’t come under their employer’s policy, which is then paid through taxes). I have 2 part-time employees. If I had to pay their coverage as well, I’d have to pay substantially less to everyone. At the very least, I’d be less able to attract the quality of folks that currently work for me. I think those should be my decisions.

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Can Franchising Survive The Baby Boomers?

As a consultant to business owners, this is a column I’ve hesitated to write for a long time. There are over 800,000 franchised businesses in the United States, and I’m not going out of my way to make that many owners mad at me. Since I often write and I speak nationally about the trends of Baby Boomer businesses, however, I frequently wonder whether the franchise business model can survive another generation in its current form.

A quick recap of franchising in the USA. “Business Model Franchising” (the sale of a turnkey concept) began in the 1940’s with KFC, A&W and Howard Johnson’s. In 1975 the first Boomers turned 30 years old, and the sale of new franchises grew from about 2,000 to over 20,000 annually in the next five years. Educated and competitive Boomers, squeezed out of Corporate America by their sheer numbers, embraced franchising with enthusiasm.

In turn, franchisors got highly motivated owners, who were willing to work very hard and make personal sacrifices for their piece of the American Dream. Predominantly in service industries, franchising benefitted from an exploding workforce of people who were focused on success.

The franchised restaurateur discovered that he or she could spend more time in the business by outsourcing other service tasks (like cutting the lawn or servicing the ice maker) to another franchisee. That franchisee could focus on building a bigger landscaping business by outsourcing his housekeeping to yet another franchisee.

The impact on our country was huge. Small business owners are productivity machines. They work long hours and weekends. This economic pyramid of highly productive small business owners spending their incomes with other highly productive small business owners has been the underpinning of American economic success for the last 35 years.

Failed franchiseNow it is coming to an end. The oldest Baby Boomers are turning 68 this year. By 2018 they will be reaching retirement age at a rate of 8,000 a day. From then until 2023, the next generation’s birthrate is half that of the Boomers, and they have considerably less enthusiasm for 65-hour or 6-day work weeks.

In addition, Boomers will consume less. The retired restaurateur starts doing his own gardening. The former landscaper does his own housework. The velocity of money (how many times it changes hands) will also slow as Boomers belatedly save for retirement.

This affects franchises particularly, because they are built on a model that assumes an owner is driving the business. If there aren’t enough owners, the model has to change. Depending on the franchise, it will happen in one of several ways.

  • Franchisors who have the foresight to develop strong manager training programs, along with the financial strength to purchase units from retiring operators, will convert to largely company-owned chains. For them, franchising will have been a developmental model, to be replaced as the first generation of franchisee partners makes its exit.
  • Successful multi-unit operators will grow as they take advantage of acquisition opportunities. Add-on units already have common systems, and family ownership succession is easier in a company with well-defined management structures. As these operators grow to nine-figure revenues and thousands of employees, they will no longer meet any normal definition of a “small” business.
  • Franchisors who remain dependent on a model that requires substantial start-up equity, long hours and hands-on management by an owner must change dramatically or fail. The franchisee they built their business model around is going away.
  • Franchisees with one or two units that they work in personally, and who don’t have children, employees or a franchisor willing to purchase the business, will close. There are simply too few small business buyers with too many alternatives.

All in all, the stereotype of a franchise as a local, mom-and-pop owned business will disappear. You can’t dispute the numbers. There aren’t enough operators  in the pipeline who fit the model of a shirtsleeve owner. Whether run by big multi-unit operators or the parent corporation, franchises will be very different ten years from now.

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Posted in Exit Planning, Exit Strategies, Thoughts and Opinions | Tagged , , , , , , | 1 Comment

One Response to Can Franchising Survive The Baby Boomers?

  1. This is a WAKE UP CALL. I had never thought about the vulnerability of the franchise industry to the demise of the boomer generation. I have to sit back and think about this. My focus has been on the impact that the boomers will have on the succession plans for independent financial planners, wealth manager and insurance agents. Just like your food and hotel franchise examples, these individuals poured their lives into building profitable practices and it is unlikely that the next generation has the motivation to continue the growth of the industry. For more than a year we have been in conversations with large corporations that provide regulatory compliance and package insurance products to support these aging entrepreneurs. The companies are finally recognizing the imapact of the loss of their top producers. I will use this franchise analogy to paint the picture for them. Thank you.

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Over Pay or Over Hire?

Many employers chase the Holy Grail of pay-for-performance. Whether it’s commission, piece work or production bonuses, we all want a system that compensates employees appropriately for the value they add to our business. Most of us also believe that better employees should be able to earn more than those who produce less.

Of course, that isn’t a universal truth. I’ll never forget the front page newspaper story when the Ford plant in Edison, NJ went on strike over incentive pay. The President of the local chapter of the United Auto Workers was quoted as saying “We would rather not work than agree to a system where one union member is paid more than another just because he does more work.

Eventually he got his wish. That plant is now closed.

bonus-schemeMost employees, however, like getting rewarded for good performance. They also like to know how much they can expect to make. The problem between the two arises when employees are dependent on incentives for a large portion of their total compensation. That’s when we run into the “over pay or over hire?” problem.

First example: A local residential carpet cleaning company advertises (as is necessary to compete in the market) “Any three rooms for $99.” Of course we all know that is a losing proposition, and that the company hopes to get additional rooms, furniture, drapes or ductwork cleaning to make up for the loss leader. The owner can’t afford to pay employees to do $99 jobs all day, so he pays them a little bit (say $10 an hour) and a substantial percentage of any add-on work. A typical employee can expect to make $17 or $18 an hour after a month or two of on the job experience.

Here is the dilemma. Employees who are accustomed to making $17 an hour won’t take a $10 job. Those who expect to make $10 are thrilled by the incentives, but as soon as they start hitting the higher hourly number, they begin voluntarily reducing their hours by calling in sick more often. Appointment commitments to customers become a nightmare, and the employee is eventually terminated. It has happened with dozens of hires.

Second example: A home care company pays site managers around $30,000 plus incentives for running a strong operation. Those incentives can raise their compensation to $50,000 or more. One of the requirements of the job is that the manager occasionally has to go into the field to provide bathing or toileting assistance to a patient when the assigned caregiver doesn’t show up. These clients are dependent on the company, and not rendering the service as promised is unacceptable.

Dilemma 2: A $30,000 manager can’t juggle the business development, management and compliance duties required to earn incentives. The $50,000 managers refuse to accept the menial (and unpleasant) tasks as part of their job.

There is nothing wrong with incentives. There is also nothing wrong with requiring employees to perform in order to earn wages commensurate with their value. The problem arises when the amount of the incentive compensation raises the job to another class of employee.As Pat Riley, the President of the Miami Heat famously said, “You can’t make a duck into an eagle.” (Even my fervent support of the San Antonio Spurs can’t make me pass up an appropriate quote.)

No amount of incentive pay will, by itself, raise an employee to another level. No amount of potential pay will make an employee accept work they see as unrewarding or beneath them. Except for salespeople, incentives should be a modest part of the compensation package.

The real solution is one that too many owners avoid. Pay employees what the job should be worth, and then hire, train and mentor people who have the necessary capabilities until they succeed. Incentives can’t replace good management, no matter how much owners may try to pretend that they will.

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2 Responses to Over Pay or Over Hire?

  1. Bill Cox says:

    Amen, “pay for performance” I often cited as a panacea for improving business performance, or worst yet, a “best practice” we all should adopt. It makes me want to throw up! There is no substitute for engaged management, but I do have to admit that “pay for performance” does require management to establish operational metrics and when an owner manager puts his own money on the line, he does tend to be engaged.
    Those of us aware of the 1920’s experiment at the Bell Labs Hawthorn plant should recall that the study showed us that productivity improves when management has key metrics to measure output and is engaged with the productivity. Out of this study, we learned (or should have learned) that there is no substitute for management paying attention to positive results – Results have to be measured and it takes metrics to measure results – Amen.
    Proponents of the virtues of “pay for performance” often cite numerous success stories of businesses that thrive with a culture using these tools. However, consider, is there causation or a correlation between such performance. In other words, do the businesses that are performing well do so because their compensation formula is some incentive plan, or because the business is among the larger population of strong businesses that have ENGAGED management with METRICS – AMEN.

  2. Tom Morton says:

    Another excellent post, John! Thank you

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Can Your Small Business Survive Disaster?

Memorial Day weekend served up numerous reminders of the vulnerability of small businesses to disasters. Boardwalk vendors were reopening on the Jersey Shore and Coney Island. San Antonio was underwater, and a large portion of Moore, Oklahoma was swept away by tornados.

Only about 35% of small (under 100 employees) businesses have insurance for interruption of business income. Most carry property and casualty insurance, which will pay for repairs and some ongoing expenses while you are closed, but there are many other ways to be impacted.

A motorcycle repair shop in New Jersey was undamaged by Superstorm Sandy, but with impassable roads and thousands of his customers dealing with lost homes (and lost motorcycles) his business was essentially shut down.

A fire in a local office building caused heavy smoke and water damage. The professionals who owned firms in the building had to be restrained by police from running in to save their records.

post sandy businessesOnly about 25% of small businesses that lose their records to disaster survive. Keeping backups off site and testing them are a requirement for any business, but there are so many other ways for a small business to suffer.

In the office building fire above, a financial management firm had complete backups and redundant offsite capabilities. They were functioning the next day, working remotely to issue month end statements, pay bills and reallocate client assets.

Unfortunately, battles between insurance companies and contractors kept them from moving back in for months. Their culture suffered from lack of communication. Potential clients didn’t want to meet in a planner’s house or restaurant to discuss their confidential finances. Business suffered, but not in any way that was insurable.

Planning for an interruption in business is straightforward. Redundant records and cash reserves need to be in place, but alternative sources of supply and temporary space are decisions that you can make on the fly. For many small businesses however, the biggest threat has nothing to do with the disasters; it is the incapacitation of the owner.

How well could your business function without you? If you were in an accident, or needed surgery, do you have a contingency plan that allows your business to survive for weeks or months in your absence?

If you are a Baby Boomer, don’t be surprised if your bank asks you for such a plan at the next credit line renewal. Bankers can read risk reports as well as any health insurance company. Older folks pay higher health premiums because they are at greater risk. Age is starting to impact lenders’ attitudes towards extending credit as well.

You should have two plans prepared. The first is for planned or unplanned absences of two weeks or less. That plan is driven by assignments of your responsibilities. Who signs checks? (And just as important, who checks the signer?) Who handles your daily functions? Which of those tasks can be left undone for two weeks, and which ones can’t?

The plan for more than two weeks incapacity is focused on decision making. Who determines courses of action for which you hold the liability? Who has the final say on hiring and firing? Who grants or refuses a concession to a major customer?

If you are fortunate enough to have a solid second-in-command (SIC) you are ahead of the game, but is he or she  able to take in the entire scope of what you would consider when making a decision? Sometimes financial executives can’t see beyond the profit margin, or sales managers can’t see beyond the transaction. In those scenarios, I often recommend shared decision making.

I once worked with a manufacturer who took extended trips into areas where he was unreachable. He left decision making jointly to his sales manager and plant manager. If the two couldn’t agree, the CFO could make whatever decision he wanted. It worked for years. The two managers disliked the CFO, so they would always work out a compromise rather than hand him the authority.

When considering your disaster readiness, don’t forget to include yourself in the plan.

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Is “Follow Your Passion” Really Bad Advice?

It’s graduation season, and honored guests clutching honorary degrees are speechifying at commencements all around the country. In a recent story on National Public Radio, quotes from celebrities including Ellen DeGeneres, Oprah Winfrey and Michael Bloomberg all included the same catch phrase: “Follow your passion.” The exhortation has become so common that the news story was about one poor Ivy Leaguer who found himself unable to enunciate his passion.

Fortunately, the fact that he made it as far as graduating from an elite institution probably bodes well for his chances of eventually doing, and being able to afford to do, what interests him. For the rest of the class of 2013, like those for several years before them, the ability to follow their passion will often be impeded by their desire to eat.

unemployment-line-now-hiringUnemployment for new college graduates remains stubbornly high. In a luncheon with an official of the Federal Reserve a few week ago, he noted an anomaly. Unemployment is at the highest sustained rate in 70 years, while the number of help wanted ads are also at an all-time high. The reluctant conclusion is that we have a workforce unable to fill the positions available. From an employer’s perspective, I see three reasons for this disconnect.

1. Just a “college degree” isn’t enough

For years, I and many other employers would use “college degree preferred” as a litmus test to identify people who could set a goal, plan to reach it, and accomplish what they set out to do. With the advent of helicopter parenting and institutional success measured in six-year graduation rates, a Bachelor’s degree often means someone who had the financial means (or the debt capacity) to hang around long enough to amass 120 or so credits. Two day a week class schedules and having mom fill out your course choices online (or pay a consultant to do it for you) doesn’t develop much strength of character.

At the same time, technology and pressure on profits have caused employers to back away from being the trainers of first resort. For many jobs, like entry level sales and retail branch management, systems have replaced decision making, and those jobs can be “dumbed down” to people who don’t have a degree-holder’s salary expectations.

2. A college degree isn’t what it used to be.

The quest for paying customers has caused colleges to expand to unprecedented levels. Here in Texas, UT now operates 9 campuses under the UT brand, enrolling 192,000 students. Texas A&M runs 8 more, with 83,000 enrollees. No one outside of academia pretends that all of those students are receiving the same level of education as ten or twenty years ago.

A part-time employee of mine showed me her class schedule a few years ago. By credits earned she was a junior, and taking upper level courses. Her choices included titles like “The Role of Women in Architecture,” “Non-traditional Literature,” and “Minority Contributions in American History.” When asked why she wasn’t focusing more on her business major she replied “Because these are all required for graduation!” I’m all for expanding people’s horizons, but not at the expense of teaching them what they need to know.

3. There is no “right” to succeed in your passion

The Constitution enshrines the “pursuit of happiness” as a basic human right. It does not make it anyone’s obligation to ensure that you succeed. We’ve raised a generation to believe that success is the inevitable outcome of effort. In a recent interview with a couple who were protesting high school teacher salaries, they complained that their wages were insufficient to support $300,000 in student loan debt. His Master’s degree was in comparative literature. Her PhD was in philosophy. Who told them that was a good investment?

Employers are scrambling to fill positions in programming, engineering and skilled trades. They share stories of graduates with little or no pertinent skills who want to focus their job interviews on salaries, advancement expectations and benefits. There is a fundamental disconnect between what our education system is providing and what our employment market is seeking. Perhaps “Follow your passion” isn’t the best advice we could be giving.

 

Posted in Thoughts and Opinions | Tagged , , , , | 5 Comments

5 Responses to Is “Follow Your Passion” Really Bad Advice?

  1. Ray says:

    Brilliantly put. It is exactly the same in the UK. Graduates with no experience of the real world assuming because they have a degree employers will welcome them and throw money at them. We have all time highs in numbers of graduates but the majority of degrees are in media studies and the like that are of little use to the average SME who will have to invest considerable sums of money to train them and educate them in what business really needs.
    We have the same ‘Follow Your Passion’ message across here and a dumbing down of standards where school children and college graduates are not allowed to fail. They have no idea what failure means or how to deal with it and are now facing it. Many sadly are being woken up with a jolt and big debts for a degree that isn’t worth anything.
    On top of that many SME’s and bigger businesses have job vacancies we can’t fill because the applicants have little to offer and expect too much.

  2. Lara August says:

    I need to take a deep breath before replying because there is some truth in what your are saying, but there is also fault to the logic. It might just be the title that rubs me wrong.

    We have had trouble hiring recently. There are literally a hundred or more applicants for each position, and few are actually qualified. However, these aren’t even for entry level jobs – we are requiring a minimum of 3-5 years of experience for most positions, and they STILL aren’t qualified. I think that this is because most SMBs can’t or don’t provide proper entry level training. My own management team even came to the realization that we were not in a position to hire recent grads, due to a combination of our lack of internal training resources and the cost/lack of availability of those resources externally. So my business is admittedly perpetuating the problem. So on the point at colleges aren’t preparing students adequately, I agree, but I think both colleges and businesses need to adjust.

    Now on to the point about passion. When I was headed to college, my dad pulled me aside and asked what I wanted to study. A straight A student, I replied, “a doctor or lawyer, and I’m leaning toward law.” I’ve never seen such a look of disappointment on his face. To everyone, including myself, I was an artist. I had always loved art and excelled at it in school and in competitions. He asked why I didn’t plan on studying art and my response what that my art teachers warned us not to wind up as “starving artists”. One of my favorite teachers recommended that I study business if I wanted to be an artist. My dad was then disappointed in my teachers and mentors. He hauled me over to the early-stage dial up Internet access that we had at home and managed to find a really cool chart showing income ranges for various professions. He showed me very wealthy and very poor salaries for each position. And then he asked, “where are you going to fall on this spectrum if you are doodling in the margins of your law books? Are you going to be one of the greatest lawyers?” He was right. I was meant to study art. I have an older brother who is a journalist. We have both “made it” in or professions and are at the top of our income categories, and I am thankful to my father for being so supportive of our dreams.

    I don’t believe that passion and entry level job preparedness should be inextricably linked in this discussion. I can’t give up on the idea of self-actualization, but maybe those dreams do need to be tempered with encouragement to pursue a double major or minor in something that will help with the first few years out of college. If I had received a business degree, it certainly would have made entry level job searches less painful, and would have benefitted me in my role as a business owner. Maybe in 1996 that wasn’t as crucial as today. I think the caution is: let’s not overly stifle the passions of an entire generation and wind up with a well-trained entry level, and later, horribly mediocre working class.

    • John F. Dini says:

      Of course we haven’t stopped needing artists, or journalists, or philosophers. I think “follow your passion” has been overused to the point where kids leaving for college just pick their favorite extracurricular activity or high school class and choose that as a “profession.” If you love philosophy, or art, or music, then by all means go for it. But “love” means you read about it on your own, practice it instead of going out on Friday night, and focus your decision making in higher education on schools where those who excel at it go. You don’t pick a mediocre course load at a local diploma mill and think that six years later you’ve earned the right to a job. One major problem is that there is no vetting process. A basketball player finds out whether he can make the grade at each point of passage. If he is passionate, he may still play basketball for a Division III school and enjoy it, but he doesn’t think that’s going to put him in the NBA. Unfortunately, there is no vetting process for philosophers until much later, when they can’t get a job.

  3. Brad Elmhorst says:

    I encouraged both of my children to find work they were passionate about. Both found desired career paths in their senior year of high school, both went on to college and graduated within their chose fields. My Occupational Therapist, immediately employed after college worked two different positions (clinic based & home health) prior to finding, four years and a marriage later, her passion as a neo-natal OT. My Film Editor, living at home worked contract jobs throughout Texas, worked in a warehouse, odd jobs and faithfully made monthly payments on his student loans, while living at home. Two years & 5 months elapsed until he found a full time editing position.

    My point in all this is following a passion has to be balanced/realistic and adaptive. Following one’s passion is not bad advice. It just needs to be balanced with the individual’s commitment (true passion, not a passing fancy) and their resources to stay the course and adapt.

  4. Zbig Skiba says:

    A wise man once said “I think owning a business is the most interesting thing you can do.” That sounds like passion to me. As does “Awake at two o’clock.” And since when is entrepreneurship a profession with a strong, predictable income stream? Sounds like lots of people following their passions.

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