Small is Big Business in Eastern Tennessee
by Fred D. Baldwin
During most of this decade, corporate downsizing has made headline news. From 1991 through 1995, separations at large companies exceeded hires, according to data from the U.S. Small Business Administration (SBA). Yet during the same period, the American economy added a net total of 7.7 million new jobs. Virtually all of those jobs were generated by firms with fewer than 500 employees, the definition of "small" used by the SBA for most statistical purposes. Moreover, 35 percent of the jobs were generated by firms the SBA calls "microbusinesses"—businesses with fewer than 5 employees—and another 32 percent were generated by firms with 5 to 19 employees.
The fact that two-thirds of the nation's net new jobs during the first half of the 1990s were created through start-ups or expansion of firms employing fewer than 20 people has not been lost on economic development specialists across Appalachia, who are today giving increasing emphasis to "growing our own" in addition to more traditional industrial recruitment efforts. "Growing our own" can mean either of two similar but still distinct efforts: encouraging small business start-ups or helping existing firms expand.
This article focuses on some of the problems and payoffs associated with helping small businesses, based on the work of the Tennessee Small Business Development Center (TSBDC), one of roughly 900 centers nationwide created under the auspices of the SBA to counsel small firms. Most of the focus here will be on helping businesses in the expansion phase, the importance of which is often overlooked. (For a related story on assisting business expansion, see "Alabama's 'Waste Not, Want Not' Help to Small Business.") Although the TSBDC assists many retail and service establishments, this article focuses on the center's assistance to manufacturing firms because of the manufacturing sector's fundamental importance to a healthy local and regional economy.
"Although we're always eager to attract businesses to Tennessee," says Governor Don Sundquist, "we know the value of helping our own small entrepreneurs expand. Small firms already create most of our new jobs, and some of them will become the homegrown, here-to-stay businesses of tomorrow."
Small Businesses Bring Stability
"I've seen the studies," says Robert A. Justice, director of the TSBDC. "Ten small businesses, each employing ten people, provide a lot more stability than one 100-employee branch plant."
That sums up the rationale for a small business growth strategy from the perspective of a local community. As an entry in a state or national report, a hundred jobs are a hundred jobs; it hardly matters whether they're all with one large establishment or spread across many small ones. But a community, or even a region, with too many of its economic eggs in a few big baskets is terribly vulnerable to change—a lesson learned many times over in Appalachia's coal regions and in what was, for a time, its Rust Belt.
It's highly relevant to Appalachian communities that small firms provide opportunities for groups historically overlooked in economic development. For example, the SBA reports that the number of all small businesses, nationally, has increased 49 percent since 1982. That's impressive, but the number of woman-owned businesses more than doubled during that same period—up by 225 percent. Minority-owned firms have also grown at a rate well above the overall averages.
Moreover, jobs generated by small firms are likely to be filled by younger workers, older workers, and women. Many of these workers prefer, or may only be able, to work on a part-time basis and thus can be accommodated by small employers. Small businesses provide about 67 percent of initial job opportunities and are responsible for most initial on-the-job training in basic skills.
Although employment in the service industries is growing faster than employment in other areas (if only because service remains more labor intensive), small firms aren't all mom-and-pop restaurants or corner retail stores. A 1982 survey showed that small firms produced 55 percent of all innovations; by 1991 small firms accounted for 25 percent of the jobs in high-technology sectors, according to the SBA. In fact, 93 percent of high-technology firms fit the SBA definition of "small," and 70 percent have fewer than 20 employees.
Despite these facts, it's easy to overlook small businesses because they are, well, small. "The small firms don't attract much attention as they grow from a garage to another building," says Robert J. Lytle, a business counselor for the TSBDC. "They haven't created their own PR." He ticks off the names of three small companies in eastern Tennessee, each helped at some point in their history by the TSBDC: RPC Specialty Coatings, BlueStone Label Company, and Dalton Stamp and Die. "RPC has about 30 employees. If you said, 'IBM's going to come down and bring in 30 jobs,' people would say, 'Wow!' If you say, 'RPC [is coming],' then it's, 'What the heck's RPC?' "
Helping with Expansion
The initials "RPC" in "RPC Specialty Coatings" stand for "Ron's Powder Coating" because the firm is owned by Ron Jones, who did in fact begin the business in his own garage. Today RPC coats metal components of products such as farm machinery and other equipment, and furniture. For example, RPC coats about 75 different parts for John Deere, everything from the frame of a lawn tractor to its bagging attachments. The process involves applying powder electrostatically and then bonding it to the metal at high temperatures for a surface that resists corrosion, chemical damage, nicks, and abrasions.
Jones started his business in 1982, spray-painting items like lawn chairs and barbecue grills. Like most small operators, he financed his modest investment in equipment on a credit card and didn't give up his salaried job immediately. It was only after three years of what he calls "eight and eight" (eight hours a day on his salaried job, eight more on his own business) that he turned to his business full-time.
In time he received an SBA-backed loan to open a new painting facility in Kingsport. But he became convinced that more than $5 million in business was leaving the area because no one had the capacity for powder coating. When John Deere decided that nearby Greeneville (Greene County) would be a good place to manufacture a new line of lawn tractors, it wanted a powder-coating site nearby. Jones, who had done small, short-run jobs for Deere in the past, saw an opportunity for serious expansion. In a bold move, he turned to the TSBDC for help in putting together a successful financing package for a building big enough for both RPC, supplier, and Deere, customer. In 1995 Jones opened a new 107,500-square-foot facility in Greeneville, 60 percent of which is leased to Deere.
"I had nothing but an idea," he says, describing the TSBDC's help at the key point in his growth. "They were considerate and thoughtful enough to listen. After seeing some small prototypes, they said I was on the right track."
Planning for Growth
A smaller firm, BlueStone Label, now located in an industrial park in Bristol (Sullivan County), Tennessee, is owned by a husband-and-wife team, Ed and Sharon Blankenship. BlueStone prints pressure-sensitive labels that find their way onto automotive products and furniture and have hundreds of other business uses. The firm employs seven people, including the Blankenships.
Ed Blankenship spent several years in various jobs, but in 1983—the year he and Sharon married—he bought out the inventory and customer list of a computer supply business. The inventory included pressure-sensitive labels and a small printing press. His initial expansions from his own basement to progressively larger areas of rented space were financed with his own and Sharon's modest savings. BlueStone's sales volume grew rapidly, but the business didn't show a profit until 1987.
"You spend every penny you've saved, earned, or managed to come across," he says. "Every reserve you have, you put on the line. We just put our heads together and said, 'We know it's going to be tough. Let's just brace ourselves now.' "
The next year he made an appointment with Lytle at the TSBDC. Lytle told him that he wasn't quite ready for expansion.
"Basically," Blankenship says, "he told me to keep doing what I was doing and to come back in a year or so. Then he'd help me with projections. I did, and he did. It's fascinating to look back at those numbers [in the business plan Lytle subsequently helped the Blankenships develop]. Every column across the board was right on—within one percent of being correct."
In 1993 BlueStone moved to its present quarters, a 13,000-square-foot building within an industrial park. Financing came from a bank loan backed by the First Tennessee Development District, a multi-county planning organization. Sales in 1997 are expected to be on the order of $2 million. Last year the firm bought high-speed printing equipment costing roughly a half million dollars. "It's expensive to grow," Blankenship sums up.
Partnering for Success
A third firm helped by the TSBDC is Dalton Stamp and Die, which is located in an industrial park in Surgoinsville (in Hawkins County, near Kingsport). It's run by Freda Andrews, and owned by Andrews, her former husband Michael Andrews, and Cosmolab, Inc. Among other activities, Dalton uses metal and rubber compounds to produce printing dies for ink transfers of artwork and text onto plastic, wood, and glass—for example, pens, pencils, and cosmetic packaging. Dalton employs eight people.
Like BlueStone, Dalton started as a basement operation—in 1992, as a joint venture between Freda and Michael Andrews and a relative, who left the company during its start-up phase. At one point, Andrews found herself with potentially crushing debt and little knowledge of running a business.
Realizing that the company desperately needed adequate financing, she sought advice from the TSBDC. With help from Lytle, she wrote a business plan and followed up on contacts made through the TSBDC. As a result, Dalton secured a loan under the Community Development Block Grant program, administered by the Tennessee Department of Economic and Community Development.
"You have to be turned down by banks three times to qualify," she says. She adds with a laugh, "That was the easy part for me."
She also did something the TSBDC's director Justice says that too few small business owners are willing to do: she sold a half interest in Dalton to another firm, Cosmolab, Inc., in Lewisburg, Tennessee. Cosmolab decorates plastic containers for major brand-name cosmetics. Its marketing power was a perfect match for Dalton's technical and graphics capabilities. Dalton's sales have doubled this year, and the firm plans to add building space and equipment.
"I have a vision of this company's growth," Andrews says. "It's so much better to have 50 percent of something big than 100 percent of nothing, but it's hard for some people to see that.
"Everything I've learned I've learned by doing," she continues. "I've spent hours and hours in the library. It's been a five-year-long series of 18-hour days. But not alone. We have an excellent team at Dalton."
Advice from A to Z
Since its creation in 1984, the TSBDC has counseled over 2,800 small-business owners and would-be entrepreneurs. About two-thirds of its work, whether measured by number of client contacts or hours of staff time, is spent on two functions: advising on start-ups (sometimes advising against them) and assisting with financing. The TSBDC also performs other functions, such as contract research and counseling clients on a variety of specialized problems.
"We'll work with you from A to Z," says Justice. "That's from advertising to zoning."
Whether the TSBDC is advising on a potential start-up or on the expansion of an existing business, its core activity is helping clients develop a business plan. The plan serves as a feasibility study for the activity being considered, and, if the activity looks promising, becomes the basis for a financing application. The TSBDC doesn't itself lend money, but it works closely with lenders. (Justice, for example, sits on the loan review committee of the First Tennessee Economic Development Corporation, which assisted with loan guarantees and secondary financing for both BlueStone Label and Dalton Stamp and Die.) If all goes well, the business plan finally becomes a management tool for monitoring progress.
Lytle, who specializes in help for manufacturing firms, lists three problems that are common to small businesses everywhere but that often pose special difficulties for small Appalachian firms: financing, marketing, and hiring.
"Let's assume someone has a good idea," Lytle begins. "The first question is, 'How am I going to finance this?' Start-ups are risky, and banks are risk-averse. They prefer expansions to start-ups. And the one with the idea still has to bring some money to the table."
Where financing is concerned, a track record of even two or three years can be crucial. The SBA reports that for the smallest firms—"mom-and-pop" operations with or without hired employees—owner capital is the most important source of financing. Other sources include trade credit, personal loans from financial institutions, and loans from friends or relatives. A 1993 study showed that 40 percent of firms with fewer than ten employees used personal credit cards for an appreciable part of their credit purchases.
In principle, neophyte entrepreneurs have access to the same sources of money available to established firms; in practice, they do not. For a good reason: even development agencies committed to accepting risks that are unacceptable to commercial lenders must recognize that owners of start-up firms will face severe tests of business skills and tenacity. It's hard to know in advance which ones will be willing to put in months and years of 16-hour days if that should become necessary.
Marketing is the second small-business problem mentioned by Lytle. "People think," he says, "that it will be like [the film] Field of Dreams: 'Build it and they will come.' But it doesn't work that way. It has to be 'Promote it and they will come.' "
Although Justice winces at using an in-vogue term like "networking," that's exactly what he urges clients to do: "I tell people, 'Hang out in the right circles. Join the Chamber of Commerce. Once you join, go to every function. Get on that committee, volunteer to do lots and lots of work. If you do quality work on those committees, you're making points with people who have access to the resources you need.' "
"The marketing gets tougher as you go along," says BlueStone Label's Ed Blankenship. "The competition is very stiff in the top markets." He credits Lytle and the TSBDC with impressing on him the importance of attending trade shows for out-of-area contacts.
A third problem that many, if not most, small businesses face typically occurs at a growth stage. It's finding skilled, reliable employees. Somewhat paradoxically, that problem can be particularly acute in areas with high unemployment rates. Entrepreneurs often need help with management specialties like personnel, accounting, and marketing; in high-unemployment areas, few of the jobless have experience of that kind. Even workers with relevant manufacturing experience can be scarce.
Small businesses find it hard to offer the salaries and fringe benefits needed to compete with established firms for people who already have the needed skills, and they often lack financial resources for extensive on-the-job training. Programs exist that bring training to the workplace, but they are in short supply. (For a description of a mobile training facility developed by the Manufacturing Technology Center based at Wytheville Community College, in Wytheville, Virginia, see "Putting the Community First," in the September-December 1996 issue of Appalachia.)
Investment Pays Off
Many Appalachian communities face the problem of physical isolation, which compounds all other problems. Transportation is particularly crucial. Ron Jones recalls a potential customer for his metal coatings business who was considering building a plant in a nearby area. Jones rolled out the red carpet for a site inspection team, but the result was a near-miss. "They liked it," he says, "until they looked at the highway."
The TSBDC can't build highways or provide other infrastructure, but there's evidence that providing advice at the right time can help a lot. One study of its operations compared the growth rate in gross sales of TSBDC clients with that of all businesses. The results: 7.3 percent sales growth for all businesses, 21.6 percent for TSBDC clients. A similar study of employment growth rates yielded the following results: 4.2 percent employment growth for all businesses, 32.9 percent growth for TSBDC clients.
The analysts concluded that every dollar from state and federal funds spent on the TSBDC counseling program (excluding costs of other functions like research) returned $8.91 in new, incremental state and federal tax revenues during the base year considered. As the study indicated, the counseling costs were essentially one-time costs, while the tax revenue stream could be expected to continue to flow over a longer period.
No doubt some of the growth rate differences resulted from the presence of many mature, slow-growth or no-growth firms in the "all business" category and a preponderance of young firms with high growth potential among TSBDC clients. That caveat hardly matters. Entrepreneurs like Jones, Blankenship, and Andrews indicate that TSBDC analysis, advice, and encouragement are not just important, but are often the key to success at critical points in firms' growth.
Moreover, the value of helping small businesses grow can't be measured only by their own sales revenues and employment rates. For example, the 30-employee payroll of RPC Specialty Coatings, most of it in Greeneville, is respectable enough for that community, but it only begins to measure RPC's importance to the local economy. Apart from whatever multiplier effect the RPC payroll has in the service and retail sectors, the firm's business activity directly supports smaller operations (for example, freight handling). And of course there's the role Jones's initiative played in influencing John Deere's decision to move a new product line to Greeneville. The presence of strong local businesses creates a base for many kinds of growth.
"We're a good attractor for other industries," Jones says. "We create more jobs outside the company than in it."
Fred D. Baldwin is a freelance writer based in Carlisle, Pennsylvania.