February 2025 Small Business Observations
In February, I surveyed my network of small business owners and leaders to gather insights on sentiment, opportunities, challenges and business conditions. I hope that this information may provide perspective and generate ideas on how to improve your Company. If you’re interested in evaluating or implementing any projects based on these insights, I am here to help.
The businesses that are the subject of the survey are:
· Privately-owned companies in the U.S. without institutional investors
· Located in the Midwest, Midsouth and Mid-Atlantic regions
· Size of $5 – $50 million revenue (or 10 to 250 employees)
· In diverse industries including consumer products, consumer services & experiences, business services and healthcare services
Key Findings:
Business owners are optimistic!
The survey found that on a scale of 10 (with 10 being most optimistic), business owners’ outlook for 2025 scored 7.6 / 10. Notably, not a single response rated below 5 (neutral). My assumption is that business owners are generally an optimistic group – one must decide the reward of starting and/or operating a company outweighs the significant risk and the investment of time and money. Said differently, the pessimists in America probably didn’t launch a small business in the first place and so aren’t responding to this survey. As a result, I would expect that over a long period of time (regardless of business cycles and market conditions) this figure would probably average 7 or 8. So I am interpreting the current figure of 7.6 as an “average” score for now and hopefully time will tell if that is an accurate read.
Business owners are focused on growth.
A strong majority of respondents (88%) referenced revenue growth as their top opportunity for 2025, with the most common drivers being New Customers (38%) and Acquisitions (38%), followed by New Products/Services (13%) or Opening New Locations (13%).
Many of the usual suspects, though I was somewhat surprised to see Acquisitions at the top of the list, especially for businesses below a scale which you would typically think of as acquisition platforms(2). However, I do believe that small businesses have growing awareness that acquisitions are a way to add not just revenue but also customers, leaders, employees, capabilities, etc. But doing acquisitions is hard. Consider that “doing a good acquisition” involves: Finding opportunities, assessing for the right fit, convincing the seller to do a deal with you, avoiding pitfalls, navigating complex tax and legal considerations, coming up with significant money to fund the deal… and then integrating the acquired company into your business without swamping your team while also properly transitioning employees, systems, customers, suppliers, etc. The quickest way to sink a business is a bad acquisition. I believe that I can shine in this situation, helping a private business gain the vast benefits of an acquisition while navigating those many issues just outlined. I’ve closed 100+ acquisitions in my career and I am excited to do many more.
Business owners are (and should be!) focused on employees.
The other big opportunities referenced related to reducing employee related expenses by reducing employee turnover or improving staffing efficiency. I concur that these are often major opportunities hidden in plain sight.
Maintaining low employee turnover in particular is one of the most important determinants of performance. In almost all companies, taking a multi-year veteran employee and replacing them with someone off the street will cause huge efficiency losses. These efficiency losses are notoriously difficult to quantify, but one high performing long tenured employee is likely as productive as at least 2 or 3 new hires. Additionally, these employees are generally not only productive at their own work, but are important culture carriers and they bring newer employees up alongside them. If all of your tenured employees departed, who would be left to train new hires?
Employee turnover can also become systemic. One factor is burnout – if the Company is short staffed due to a departure or two, and remaining employees must work overtime (or simply work harder), at some point they too may depart and the issue can spiral. Additionally, do not underestimate the “water cooler” talk. If employees are unhappy, they will share it with their peers. Negative morale can take a long time to address.
I have two specific measures I think every small business owner should take and I’m happy speak about them next time we connect.
Business owners top concerns are related to either employees or external factors.
The top threat to businesses in 2025 is viewed as an inability to hire qualified employees (38% of responses). This is no surprise given the functionally “full employment” environment for workers in America today (see section above for commentary on the importance of retaining current employees). For skilled or specialized workers in particular, many of these professions simply suffer from an imbalance, with higher demand for workers than the number of people receiving training / degrees each year. Retaining the talent you have and then finding the right playbook to recruit are critical.
Beyond that, the major threats are viewed as a slowdown in consumer spending (25%), competition in the market (25%) and input cost increases (13%). I do believe that the American consumer (particularly on the lower end of the income scale) is in a less favorable position versus the past several years (the stimulus money is long gone), so caution is warranted on that front.
I was surprised that input costs / inflation did not appear more often, and that interest rates were not listed at all. Notwithstanding certain items like eggs, we are certainly seeing “less bad” inflation than we were in 2021 – 2023. However, inflation has been stubbornly higher than average and as a result the Fed rate cuts appear to have stalled out after an aggregate reduction of 1.0%, which amounts to pretty modest help for businesses and consumers. As for assessing the likelihood or impact of various U.S. tariffs and resulting international trade wars … ¯\_(ツ)_/¯ … if you know the answer, put some trades on and profit. Most American companies supply chains’ are global (directly or indirectly), and it is expensive and generally takes significant time (years not months) to change international suppliers to factories in a new country or new continent. Needless to say, suffering 10 – 50% cost increases on inputs and/or being without a key input for a long period of time would be a major challenge for a business. It is difficult to advise actions against this backdrop, other than to say that it is always a good idea to have redundancy.
As for rates, last Summer the discussions were about how much and how quickly the Fed will cut rates (with many calling for 1.50% or 2.00% reductions by the end of 2025). At this point, the market is expecting 0.25% in cuts (or maybe none). If your business has debt, I do have thoughts on managing interest expense that I would be happy to share.
Business owners recognize the “functional” minimum wage.
The table below outlines what survey responses said about “the lowest wage offer which would be accepted by an entry level employee (with no training or prior experience)” in your home market.
It’s not surprising that wages are higher in higher cost-of-living markets like the Mid-Atlantic (e.g. New Jersey and Maryland), that the Midwest (e.g. Michigan and Ohio) is a bit lower and that the Midsouth (e.g. Tennessee and Arkansas) is a bit lower still. Like most businesses, the businesses surveyed tend to be in metro areas (rather than rural areas), which may impact the results. However, the Federal minimum wage of $7.25/hour (and many of the lower State minimum wages where applicable) are far below the rate that must be offered to actually get an employee to accept a job. Of course it varies by market, but $14.00 – $16.50 / hour is viewed as the practical minimum wage today, and employees have many employment options at and above those levels.
Functional Minimum Wage Survey
The lowest wage offer which would be accepted by an entry level employee (with no training or prior experience)
Business owners are benefitting from a wide variety of technology systems.
The vast majority of responses (88%) highly recommended that small business owners utilize technology systems to manage their business, with the range of systems and tools referenced including:
• Customer Relationship Management
• Data Visualization (Power B.I., Looker)
• Human Resources and Training (Bamboo, Trainual)
• Inventory Management
• Customer Experience Survey
Implementing a new system certainly can be time-consuming, expensive and disruptive, and I have seen “bad launches” hurt a business for months after being handled poorly. Some major challenges include: selecting a “right sized” system for your needs, finding the right partner or vendor to offer your organization support, getting buy in from employees and leaders, training users, and (importantly!) actually using the system in a way that is valuable to your organization. However, when done well, a new system can help bring an organization to a new level of performance, capable of doing things you didn’t imagine possible previously. For a Company trying to grow significantly, new systems will be necessary ingredient for success.
Other respondents referenced the importance of preparing an annual budget and forecasting demand in the shorter term to help manage the business (staffing, operations, inventory, etc.). A business adage I have always agreed with is that “What gets measured is what gets managed”. A monthly and annual budget process can be a great first step in an organization setting goals and then measuring progress against them. If you desire to set up or improve budgeting and financial reporting processes, I am happy to help.
Business owners have experienced some cyber-security attacks.
While not in the majority of responses, 25% of businesses experienced cyber-security attacks (e.g. phishing or ransomware) in the past year, with some companies experiencing multiple such events within the year. I think the conventional wisdom is that small businesses are “under the radar” for such events, and I think that is true to some degree – bad actors (like “hackers”) are generally profit motivated and so focus their efforts on big targets. The larger and more high profile a business becomes, the more it may be perceived as a worthwhile target. My two questions for consideration would be i) how big is “big enough to be hacked” and ii) what would be the cost (and cost of disruption) of being hacked? As with any aspect of a business, an owner needs to decide what is financially sensible – certainly a Company generating $1 million a year in profit should not invest $1 million a year in cyber-security. However, its worth considering the specifics of your business (e.g. holding customer personal and payment data, holding confidential patient information, processing orders through your website, etc.) and considering the right level of action to mitigate this risk.
Business owners mostly have not established formal governance.
A majority of respondents (63%) say their Company does not have a Board of Directors. I get it – for a small business, the owner plays all the roles including Owner, CEO, and many more (like clerk, break room coffee maker and team therapist). Most small business owners I know are both the owner and the CEO, and that may not change for a long time – and that is a very good thing! A huge part of what makes any business successful is the effort the owner put into building it.
BUT. No one can do everything themselves, no person is Superman. As an organization grows, roles specialize to add more talent and increase the company’s potential – and I think most business owners understand that concept.
You might be surprised how few people can answer the question “What does a Board of Directors do?” (at least without Googling it). At the right time and at the right scale, I think it may be one of the single most important decisions you can make for your business. This is something I am very passionate about and I would be happy to discuss it with you!
I hope you enjoyed this and I look forward to talking soon.
Thanks,
Andrew
(1) Figures are estimates and intended to be directionally accurate (and may have limited exceptions).
(2) Admittedly that may reflect selection bias as my business network has largely been formed by two decades in the deal business.