So How Do We Define a ‘Small Business’ Anyway?

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Woman at the markets checkout

Google “small business.” You’ll get about 1 billion results — literally.

That’s because small businesses are the lifeblood of the U.S. economy. They’re also the places we most often frequent, from mom-and-pop stores to food trucks to print shops. They account for around 46% of the private non-farm GDP, about 63% of net new jobs, and about 49% of private sector payrolls — though these stats are trending down precipitously. As such, small businesses are incentivized accordingly with a host of credits, rebates, and programs. Some estimates suggest that states and localities extend about $50 billion to small business tax incentives every year.

So yeah, small businesses may be small but they’re a big deal.
Now that we know why we care about small businesses, let’s dig into those Google results further. You’ll find the usual suspects like LegalZoom (which offers services to incorporate), the Small Business Administration (the Federal Government’s arm for supporting entrepreneurs and small businesses), and QuickBooks (business accounting software). Dig deeper and you’ll see ads from Salesforce, Cisco, and Norton, a very different cadre, no? All scalable software-as-a-service and IT solutions best fit for businesses serving other businesses. What’s the overlap between small business customers of the SBA and those of Salesforce? Likely not much.

Switching over to the small business section of major publications: The Huffington Post has a picture of Richard Branson as its main story, while The Wall Street Journal lists headlines like “Chinese Ride-Hailing Startup Raises $2 Billion” and “EMC to Sell Dropbox Rival Syncplicity;” Fortune writes, “This site is running Facebook ads that say Facebook is creepy,” in reference to social network Ello; and Crain’s headlines with “Now you can make a purchase with your American Express password” and “Amazon cloud-computing rival raises $83M,” in reference to Digital Ocean.

This begs the question, what percent of small businesses use or have even heard of EMC, Ello, Digital Ocean, or Didi Kuaidi (the Chinese ride-hailing startup)?! My guess: almost none. It’s a classic communications failure with different publications and enterprise tools working off of varying definitions of “small business.”

How do these organizations define small business?
The lack of agreement is widespread and rampant. To name a few sources:

“500 employees for most manufacturing and mining industries and $7.5 million in average annual receipts for many nonmanufacturing industries. However, there are a number of exceptions…by sector,” 45 pages worth to be exact. — SBA

Among those execeptions, in manufacturing, is the maximum number of employees, which moves up to 1500, and in the construction sector, the maximum annual receipts must not exceed $17 million.

“A small business is defined as any business with fewer than 15 employees.” — Australian Fair Work Act

“A small business is defined as any business with fewer than 50 employees or less than or equal to 10 million Euros in either (annual) turnover or balance sheet assets.” — European Union

“The current formula says a small business must have fewer than 250 workers or max out at $10 million a year in averaged annual revenue.” — Virginia Secretary of Commerce

Others further segment businesses into micro, small, medium, large, and enterprise. While there’s no definitive definition, a combination of industry, revenue, market share, and headcount seem to be most commonly used.

Why care about nomenclature?
As Ami Kassar eloquently describes: “There is little dispute that there are some 27 million small businesses in the United States. There is also little dispute that the vast majority of them have revenue of $1 million or less. It would probably be conservative to estimate that 99 percent of them have revenue of $5 million or less. So when one starts throwing around numbers of $20 million or less, you start to muck up all the stats and hide the reality of what’s happening in the market.”

If we recall, small businesses pack a big punch when it comes to the economy. A working definition that most people and corporations can agree on would aid market interpretations, statistical analyses, and, of course, make it simpler for advertisers to reach the right audience.

I’m not someone who really wants to argue semantics, but let me propose a simpleton’s view on how to define small business:

# Businesses (US, <500 employees) ~30 million

# Businesses w/ physical locations (brick & mortar) ~20 million

# Businesses w/ physical locations as independent operations (non-chain, <6 locations) ~10 million

# Businesses w/ physical & independent locations that are consumer-facing (B2C not B2B) ~5 million

Generally speaking, these 5 million businesses in the final category are the single-location neighborhood dress shops, convenience stores, hair salons, law firms, chiropractor’s offices, restaurants, photo studios, gyms, etc., where you spend the vast majority of your discretionary income. At Sidewalk, we call these VSBs (very small businesses).

If you’d like to perform a sanity check on this, take the total number of firms, less the nonemployer firms (those without payroll or those with self-employed individuals operating unincorporated businesses). This equals the number of employer firms (i.e. firms with payroll). Per the US Census, that yield is around 6 million, of which around 3.5 million (or about 60%) have fewer than five employees, and around 5.2 million (about 90%) have fewer than 20 employees.

So the next time you mention “small business” in reference to that loan you made, listing you claimed, wonderful donut you ate, cute outfit you bought, or fab massage you got, remember that you were almost certainly in the hands of a VSB. And while that VSB isn’t on Ello and is most definitely not even close to being Salesforce certified, they also shouldn’t be (hint: stop advertising to them).

Mo-YehiaMo Yehia is a former-banker-turned-human and co-founder of Sidewalk. He’s lesser known for stints at Sparkle Buggy Car Wash and Lehman Brothers. Backed by 500 Startups, Sidewalk’s business intelligence helps sales and marketing teams close more deals faster and to their dream SMB clients.