Distinctive Characteristics of Minority Owned Small Businesses in Washington

Transcription

1 Distinctive Characteristics of Minority Owned Small Businesses in Washington July 2007 This report was prepared by: Paul Sommers, Principal Investigator, Seattle University Paul Irby, Hebert Research Jim Hebert, Hebert Research Center on Metropolitan Development The statements, conclusions and recommendations are those of the authors and do not necessarily reflect the views of the Economic Development Administration This Report was Prepared under an Award from the U.S. Department of Commerce Economic Development Administration

2 Executive Summary In order to assess the characteristics of minority and non-minority small businesses in Washington, a random sample of firms was surveyed by telephone in the winter of The survey instrument was developed by Seattle University and Hebert Research, and reviewed by an advisory committee of experienced small business advisors who work with minority owned firms in the Puget Sound. The sample frame was constructed to represent the entire state, with 50 percent of the respondents from the Puget Sound and 50 percent from the rest of the state. The sample was also stratified by major industry groups to ensure a diverse set of businesses. Only sectors with little opportunity for small or minority business were excluded from the sample frame, e.g., utility companies. Nonprofits and government agencies were also excluded. A random sample of 10,407 businesses was drawn from Dun & Bradstreet s database. If a working phone number was found for a headquarters establishment located in the state of Washington, a preliminary contact was made to ensure that the owner or chief financial officer would be willing to respond to the survey. Either at that time or at a later time more convenient to the owner or CFO, the interview was conducted. Interviewing continued until the sample frame was filled with firms of the appropriate industry and minority or non-minority ownership status. Minority ownership, while coded in the Dun & Bradstreet database, was also verified through a question in the survey, and only those firms who selfidentified as minority owned are classified as such in the results. The final sample consists of 200 minority owned firms and 260 non-minority firms. All firms in the sample are small businesses by the U.S. Small Business Administration definition in that they have less than 500 employees. The distribution by industry and ownership is shown in the table below. The survey was carried out by Hebert Research in February and March of Industry Segment Non Minority Minority Ag/fishing Construction Manufacturing Wholesale/transportation Retail Services Finance/insurance/real estate TOTAL Similarities between Minority and Non-Minority Owned Businesses The results show that in many respects, minority-owned small businesses resemble nonminority owned small businesses. Both minority and non-minority business owners tend to be well educated; less than 20 percent of both groups lack at least some college experience and about 50 percent have a baccalaureate or higher degree. About 49 percent of the owners are male and 51 percent are female. On a 10 point scale, both sets of firms rate their confidence in the state of the economy at about 6, and they tended to be relatively satisfied with the experience of running their businesses (rating of 7.8). The i

3 typical firm size is 5 to 5.5 employees, with an expectation of adding 1 to 1.5 employees in the year ahead. The average minority owned firm in this sample had gross revenues last year of $485,000, compared to $469,000 for non-minority firms; this difference is not statistically significant. In the current year, reported revenues were almost identical: $542,357 for minority-owned firms and $544,610 for non-minority owned businesses. Profits were also similar for the minority and non-minority owned firms. Revenues and profits tend to be larger for Puget Sound businesses compared to firms from the rest of the state, although this difference is not significant, and there are no significant differences between minority and non-minority owned business revenues and profits in these two parts of the state. Membership rates in business organizations such as chambers of commerce and trade associations are similar among the minority and non-minority owned firms. Business credit cards are the most frequently used source of financing for all respondents. Over three quarters of minority and non-minority owned firms have general liability insurance; the exceptions are minority owned service and retail companies who less frequently report having liability insurance than their non-minority owned counterparts. About half of the respondents have business plans of some sort, and at least 60 percent of both groups of firms rate the importance of a business plan quite highly (ratings of 8 to 10). At least three quarters of all respondents report use of a professional accountant to prepare financial statements. Larger firms (8 or more employees and $746,000 or more in annual revenue) are more likely to prepare monthly financial statements, while the smaller firms rely on quarterly or annual statements. Most of these small businesses do not have any sort of board, formal or informal (over 70 percent). However, among those firms that do have a board of directors, minority-owned firms are more likely to have an informal board (19 percent vs. 12 percent). Distinctive Differences Between Minority and Non-Minority Owned Firms In other respects, the minority-owned firms have distinctive characteristics. Minorityowners are significantly more likely to be immigrants; over a third of the minority owners are immigrants but only ten percent of the non-minority owners are immigrants. Minority-owned construction firms are more likely to use seasonal labor, and minorityowned manufacturing firms are more likely to hire part-time employees. More minority owned firms rely on government contracts as a source of business, especially in the construction industry. Nearly 36 percent of minority-owned construction firm revenues came from government contracts as compared to 2 percent of the revenues of nonminority-owned construction firms. International sales are also more important for minority-owned firms in the wholesale trade/transportation cluster and in the manufacturing industries. Over 11 percent of minority owned manufacturing sales came from exports compared to under 2 percent of the sales of non-minority owned manufacturers. Over 17 percent of the sales of minority-owned wholesale/transportation companies came from exports compared to just 5 percent of the sales of comparable nonminority-owned businesses. ii

4 There were several differences on benefit plans. Minority-owned firms are more likely to not offer any benefits (32 percent of minority owned firms vs. 19 percent of other owners). Medical/health insurance is offered by 31 percent of minority owned firms but by 37 percent of other businesses. Nearly 17 percent of non-minority owned firms offer a 401k plan for retirement savings vs. 11 percent of minority-owned firms. On the other hand, 8 percent of minority-owned firms offer pension plans or company retirement programs compared to just 3 percent of other firms. When queried about major challenges facing their businesses, minority owned firms more frequently nominated bonding and insurance issues, along with new business development issues, than did non-minority owned firms. On the other hand, the nonminority owned firms more frequently mentioned that finding and retaining employees is a major challenge. Minority owned firms more frequently reported use of personal credit cards to finance their business operations. Minority construction and wholesale/transportation businesses were more likely to lack bonding to support their operations. There are some significant differences between minority owned and non-minority owned businesses in the use of different legal mechanisms to organize firms. Minority-owned firms are more likely to be S corporations (21 percent of minority respondents vs. 11 percent of non-minority respondents). Non-minority respondents are more likely to be structured as sole proprietorships (51 percent vs. 41 percent of minority owned firms) or as limited liability corporations (13.5 percent vs. 8.5 percent of minority owned firms). Key Differences among Ethnic Groups The following key findings were based on an analysis of the survey responses for African American, Asian and Hispanic owned companies. Businesses owned by African Americans have the following distinctive characteristics compared to other minority-owned firms: The second highest level of business confidence (6.28) among the three major ethnic groups. Average revenues last year of $344,914 with net profits averaging $38,090 (11% of revenues). A mean employment level of 2.87 total employees. African American firm owners were significantly more likely to report having a membership in some type of trade or professional association. This group was much more likely to mention credit availability as a major business constraint (69.4%) and they gave significantly higher ratings for their concern over maintaining cash flow (mean = 9.05); they were also more likely to use personal credit cards than were Asian or Hispanic owners. African American owners are more likely to have made investments in technology (80.6%) than are Hispanic (60.4%) or Asian (32.9%) owners; African American owners cited business development (70.3%) as a major constraint more often than Asian and Hispanic owners. iii

5 African American business owners are much more likely to report having a business plan (73.0%) than are Asian (43.4%) or Hispanic (48.9%) owners. The vast majority (80.6%) of African American firm owners prepare their financial statements on a quarterly basis. The typical African American owned firm, like all small businesses statewide, has no board of directors; those firms with a board are statistically different from Asian and Hispanic firms in that they are more likely (18.9%) to have a formal board of directors and less likely (5.4%) to have an informal board. African American owned firms gave the highest ratings of the three groups to interest in educational seminars (6.27 compared to a non minority average of 4.16 and overall minority average of 4.45). Businesses owned by Asians have the following distinctive characteristics: Asian-owned firms gave the highest rating of business confidence (6.59) in the economy from the perspective of their firm and industry. The typical Asian owned firm grossed $736,680 in revenues, the highest of the three major ethnic groups, and averaged $94,348 in net profits (13% of revenues). The average firm has 7.51 total employees. Asian firm owners are significantly less likely to belong to a local chamber of commerce. Asian firms are the least likely of the three groups to need assistance. They mention credit availability the least and rate their level of concern with maintaining cash flow the lowest among all groups of minority-owned firms; Asian owners are more likely to file their financial statements either on a monthly (36.0%) or annual (33.3%) basis. Owners belonging to the Asian ethnic group gave the lowest ratings of interest to educational seminars (3.65 compared to overall minority-owned firm average of 4.45). Businesses owned by Hispanics have the following distinctive characteristics: Hispanic owned firms have the lowest business confidence level (4.98). They also have the lowest average revenues of $273,356 but relatively high profits of $65,669 (24% of revenues). The average firm has 3.29 total employees. Hispanic owners are significantly less likely (14.9%) to mention providing health insurance for their employees and are more likely to say they offer no paid benefits (31.9%). Hispanic owned firms are more likely to report lacking an understanding of tax and regulatory requirements than are Asian and African American owned firms. Hispanic business owners are significantly less likely to use a professional accountant (68.8%) compared to over 85 percent of African American and Asian firm owners. Along with the Asian owners, Hispanic business owners are more likely to file their financial statements either on a monthly (25.0%) or annual (35.4%) basis. iv

6 Hispanic owned firms are less likely (56.3%) than African American or Asian owned firms to have a strategy in place for business sustainability (i.e. building value of firm to sell, planning to sell to employees, other type of strategy). Owners in this group gave moderate ratings (5.46) to interest in educational seminars to assist their business, which was higher than non-minority firms (4.16) and the overall minority average (4.45). Puget Sound vs. the Rest of the State The sample is not large enough to report on all variables in a four way classification of Puget Sound vs. rest of state, and minority vs. non-minority ownership at the same time. However, many differences exist in the economic situation in the Puget Sound as compared to the rest of the state. Surprisingly there are very few significant differences between small businesses in these two regions of the state (considering minority and nonminority owned firms together in each region). Those differences have already been mentioned small businesses in the Puget Sound tend to have somewhat higher revenues and profits. The distribution of firms by employment level in the past, at present, and expected future employment is almost identical. There are no significant differences between small businesses on any of the other variables covered in the survey. Detailed findings on businesses in the Puget Sound and the rest of the state are provided near the end of the report, providing a comprehensive profile of small business in terms of issues firms find significant, sources of credit, reliance on formal boards of directors and use of business plans. Organizations involved in small business counseling may find these findings a useful reference point for assessing the relevance of their services or guiding firms to a more successful business strategy. v

7 Table of Contents Page Table of Contents 1 Introduction 1 Research Objectives 3 Methodology 3 Survey Results 5 Respondent Profile 5 Business Confidence 7 Overall Satisfaction with Running Business 8 Employment 9 Revenues 14 Profits 18 Selected Business Indicators and Trends 22 Compensation 27 Financial Issues 30 Business Plans 31 Accounting and Financial Statements 32 Legal and Governance Issues 34 External Issues: Technology, Energy, Environment, and Education 36 Key Findings by Minority Status 38 Summary of Findings by Major Ethnic Group 41 African American Owned Firms 41 Asian Owned Firms 42 Hispanic Owned Firms 42 Summary of Findings by Region: Puget Sound vs. the Rest of the State 43 Conclusions 48 Appendix 50 Survey Administration 50 Survey Instrument 52 Advisory Committee Members 59

8 Introduction This report assesses the status of minority owned small businesses in Washington State using data from a survey conducted in the winter of Minority owned firms are compared to a matched sample of non-minority owned firms in the same industries located in two broad regions of the state. An equal number of Puget Sound businesses and businesses located in the rest of the state are included in the sample which was drawn from Dun & Bradstreet s database. The results are statistically representative of the small business population in the state. The overall goal of the study is to assess the status and report on the challenges perceived by minority owned firms, using the comparison group of non-minority owned firms to establish what is distinctive and different about minority owned firms in this state. Prior research at the national level found that minority owned businesses represent 15.1 percent of all U.S. businesses as of 1997, a proportion that rose fairly dramatically from 6.8 percent in However, with the minority share of the population equaling 21 percent in 1982 and 32 percent in 2002, minority business ownership was lower than it was among the population as a whole. This study also found that survival rates of minority businesses were lower than for non-minority businesses, but the expansion rates of surviving minority owned business were higher than that of non-minority owned firms. 1 This interesting mix of findings lower survival rates but higher expansion rates for surviving minority owned firms suggests that the competitive process for minority owners is somehow different than for non-minority firms. Another study highlighting the distinctive characteristics of minority owned firms was based on a national survey conducted in This study focuses on black and white Americans perceptions of entrepreneurship opportunities. It concludes that black Americans are more likely to try starting a business than white Americans, but that established business ownership is less prevalent among blacks than whites. These findings suggest again that the competitive environment is different for minority owned firms, but the scope of this study does not get deeply into what those differences are. 2 A somewhat older study conducted by Shorebank Advisory Services for the Urban Enterprise Center in Seattle in 1995 also hints at the significant differences in the minority business environment. Based on interviews of 32 minority owned firms, this study focused on financing challenges faced by minority entrepreneurs. Many of these firms reported problems in securing debt, including bank and subordinated debt, and few had attracted any equity capital. This study pointed to mis-matches between minority firm needs and the available financing programs. Bank and non-bank lending programs often had a narrow geographic focus that did not meet firms needs, and existing programs often had size constraints that did not meet the needs of growing firms. In 1 Lowrey, Ying,, February 2005, Dynamics of minority-owned employer establishments, , Washington, D.C.: U.S. Small Business Administration, Office of Advocacy. 2 Köllinger, Philipp and Maria Minniti, April 2006, Not for lack of trying: American entrepreneurship in black and white, Berlin: German Institute for Economic Research. 1

9 addition, the decentralization of capital sources, credit sources, and technical assistance programs made it difficult for entrepreneurs to identify available resources or access them in a timely fashion. 3 The existing research on-minority business suggests that the competitive environment is different for these entrepreneurs than it is for non-minority entrepreneurs, but offers few insights about the nature of those differences. One local study, based on a small interview sample, points to problems in accessing capital, but with no comparison group in that study, one cannot be sure that the minority entrepreneurs interviewed in that study are any different than non-minority entrepreneurs. In addition that local study is rather dated and it is possible that the problems identified in 1995 have since been corrected. Developing a better understanding of minority owned businesses is important given population trends. Minorities constituted 15.7 percent of the population in 1990; this proportion grew to 22.4 by 2003 and continues to rise, with projections by the state s demographers suggesting that that minorities will constitute 30 percent of the state population by Understanding the challenges and opportunities for minority owned businesses is particularly important given these trends. Thus a new study is needed to assess current conditions, comparing minority owned firms in Washington to non-minority owned small businesses facing similar circumstances in terms of industry and location. This study was designed to meet those needs. Following a discussion of research objectives and methodology, the full survey results are presented in the following pages, focusing on the similarities and differences between the responses of minority and non-minority entrepreneurs. In two final sections of the report, results are broken out first by racial/ethnic group, reporting findings concerning African-American, Hispanic, and Asian owned firms, and second by region, reporting findings for all respondents (minority and non-minority) located in the Puget Sound and in the rest of the state. The interview guide used in the study and a listing of members of an advisory group that reviewed the work of the research team is provided in appendices at the end of the report. 3 Shorebank Advisory Services, June 1995, Financing needs of minority-owned firms in Washington State, Chicago and Seattle: Shorebank Advisory Services for The Urban Enterprise Center of the Greater Seattle Chamber of Commerce. 4 Office of Financial Management, U.S. census data files at: 2

10 Research Objectives The following objectives were addressed in conducting this study: Survey a representative sample of comparable minority and non-minority businesses, segmented by industry and geographic location. Analyze differences between minority and non-minority businesses on a number of business issues. Measure differences based on industry sector and region of the state. Explore whether there are any differences among the major ethnic minority categories (i.e. African American, Asian, Hispanic, etc.). Examine differences between companies based on frequency of filing financial statements. Measure levels of business confidence. Examine historical growth rates in jobs, revenues and profits. Compare selected business performance indicators such as revenues per employee. Identify the level of expected growth. Assess overall satisfaction with running the business. Explore difficulties or obstacles faced in the operation of the business. Examine difficulties with financing and credit usage. Examine the type of corporate governance used. Explore whether there are any succession plans for transitioning company ownership. Determine the degree to which businesses are involved in international trade. Measure what percentage each business relies on government contracts as a source of revenue. Examine what percentage of owners are first generation immigrants to the US. Methodology Sample Frame and Sampling Procedure Survey of Businesses in Washington State A survey of 460 Washington State businesses was conducted by Hebert Research in February 2007 using a survey instrument developed jointly with Seattle University s Center on Metropolitan Development. The survey instrument was reviewed by an advisory committee of experienced small business advisors who work with minority owned firms in the Puget Sound. The details on survey administration and analytic procedures, the survey instrument, and a list of the advisory group members are provided in the Appendix to this report. 3

11 The sample of 460 business owners was comprised of 200 verified minority-owned businesses and 260 verified non-minority owned businesses. A set of questions on the ethnic background of the owner(s) allowed the sampling procedure to differentiate between either type of firm. Businesses were randomly selected from a business database obtained from Dun & Bradstreet. In order to focus on-minority businesses, over 4,000 business listings were obtained from Dun & Bradstreet s special minority coded list of 6,012 minority-owned companies in Washington. The non-minority businesses were randomly selected from 197,641 Washington businesses in the Dun & Bradstreet database. The response rate for this survey was 50.6%, based on comparing the number of completed interviews to the number of firm owners or CFOs who initially indicated a willingness to respond to the survey questions. The incidence rate, or the percentage of individuals initially contacted that were willing to respond to the survey and were also qualified for the study by being a locally-headquartered office with a working telephone number, was 72.0%. Overall, 10,407 businesses were contacted to complete the survey. A stratified probability sampling frame was used at the industry level, in order to reach acceptable minimum sample cell sizes for analysis. Weighting was then used whenever overall population figures were needed, which placed an appropriate share on each industry within the minority and within the non-minority samples. As the following table shows, a total of 7 industry segments were profiled, covering the broad range of business types. Within each industry segment, there are multiple subcategories, defined by 2-digit NAICS code. An analysis was conducted on the size of the populations of minority businesses by 2-digit NAICS code and in cases where there were too few minority firms statewide to sample, that code was excluded within its parent category and it was also excluded among the non-minority sample for comparability. Within the manufacturing parent group, all 2-digit sub-categories were included because the distribution of minority firms was low but relatively consistent across these subcategories. Government and non-profit organizations were not included in order to focus on the business community. Summary of Interviews by Industry and Minority Status Industry Segment Minority Ag/fishing Construction Manufacturing Wholesale/transportation Retail Services Finance/insurance/real estate TOTAL

12 Survey Results Respondent Profile Overall, minority business owners were statistically similar to non-minority owners across a number of indicators. Both groups of owners have been in business 16 years, they had 9-10 years of experience in the industry before starting the firm, they have at least some college background, and they are around 50% female. The statistically significant difference was that minority owners were much more likely to be an immigrant (34.7%) compared to non-minority owners (9.6%). Non-minority owners of manufacturing firms tended to have more years in the business than their minority counterparts. Within the population of minority-owned firms differences in the breakout of industries were not statistically significant by major ethnic group (p =.306), with the exception that Hispanic owned firms were more likely to be in the agriculture industry. Years in Business Agriculture/fishing Construction Manufacturing Wholesale/Transportation Retail Services Financial All Firms Years of Experience in Industry before Forming Company Agriculture/fishing Construction Manufacturing Wholesale/Transportation Retail Services Financial All Firms There was not a statistically significant relationship between years in business and years of experience in the industry. For minority owned firms the correlation was -.068, which was not significant (p=.356). For non-minority owned firms the correlation was (p=.507), also not significant. These weak statistical relationships were slightly negative, suggesting that those with more years in business tend to have less experience prior to forming the company. 5

13 Minority owned businesses are significantly more likely to be run by an immigrant (34.7%) as compared to non-minority owned firms (9.6%). Ethnic Background of Management Non-minority Minority Caucasian 96.5% 11.6% African American 0.0% 19.7% Hispanic 0.0% 11.0% Asian 0.0% 29.1% Pacific Islander 0.0% 3.9% Native American 2.8% 17.3% Other 0.7% 7.4% Significance level (p=) Note that the overall business community is balanced between male and female owners. However, one should keep in mind the vast majority of business owners are running a small business with a few employees. When companies with 10 or more employees were selected, the share of female owners was 37.1%, and among the larger firms with 100 or more employees only 23.4% were female. Minority status was not a factor. Educational Background of Respondent Minority Less than High School 1.2% 3.0% High School 14.6% 15.5% Some college 20.0% 18.5% 2-year college degree 13.1% 16.0% 4-year college degree 26.5% 23.5% Advanced degree 20.4% 20.5% Refused 1.5% 1.5% Don t know 2.7% 1.5% Significance level (p=) Immigrant Status of Owner Minority Yes 9.6% 34.7% No 88.1% 63.8% Refused 1.5% 0.5% Don t know 0.8% 1.0% Significance level (p=) Gender of Owner Minority Male 48.8% 49.2% Female 51.2% 50.8% Significance level (p=)

14 Business Confidence Business confidence was rated on a scale of 0-10, where 10 meant a very high degree of confidence in the economy from the perspective of their business experience. Levels of business confidence were generally highest for construction, services and financial firms and were lowest for agricultural firms. However, tests of differences between minority and non-minority businesses revealed no significant findings (p values well over.10). The standard deviation revealed a moderate amount of variability relative to the mean, with a value of 2.30 for minority firms and 2.22 for non-minority firms. As the following chart shows, the majority of firms gave ratings of 5, 7 or 8 on the 0-10 scale. The distribution of ratings by both groups was similar except for the 8 rating, which was given by a higher percentage of minority owned firms. 35.0% Business Confidence Ratings (0-10 scale) 30.0% 25.0% 20.0% Minority Non minority 15.0% 10.0% 5.0% 0.0% Agriculture/fishing Construction Manufacturing Wholesale/Transportation Retail Services Financial All Firms

15 Further Analysis Differences by major ethnic group were statistically significant. Asian owned firms reported the highest average confidence level of 6.59, followed by African American owned firms, at Hispanic business owners rated their confidence only 4.98 on average. [p=.001; Eta Squared =.091] Overall Satisfaction with Running Business Both minority and non-minority business owners were fairly satisfied with the experience of running their business, giving average ratings of 7-8 on the 0-10 scale. While there was no statistical difference for the entire group of industries together (p=.779), there were differences in the case of retail and services businesses. Non-minority retailers were generally more satisfied (8.23) than minority retail owners (6.78), and minority services business owners were more satisfied (8.41) than were non-minority owners (7.46). For the overall business community, there was a lot of homogeneity between minority and non-minority business owners, as the following chart demonstrates. There is not a single rating point along the 0-10 scale where the two groups differ by more than 4%. 35.0% Satisfaction with Running the Business (0-10 scale) 30.0% 25.0% 20.0% Minority Non minority 15.0% 10.0% 5.0% 0.0%

16 Further Analysis Differences by major ethnic group were not statistically significant (p=.408). Employment Total Employment Levels A review of historical and expected employment trends did not find any significant differences by minority status. Minority businesses statewide grew from 5.1 employees in 2006 to 5.4 currently, and they expect to increase to 6.06 on average by next year. Because of the variability in firm sizes, further research is recommended with larger sample sizes to measure more precise differences in employment by minority status and industry. Agriculture/fishing Construction Manufacturing Wholesale/Transportation Retail Services Financial All Firms Last Year Total Employment Agriculture/fishing Construction Manufacturing Wholesale/Transportation Retail Services Financial All Firms Current Total Employment Agriculture/fishing Construction Manufacturing Wholesale/Transportation Retail Services Financial All Firms

17 Further Analysis Differences were statistically significant by major ethnic group for current employment. Asian owned firms reported significantly larger staff sizes (mean = 7.51) compared to Hispanic owned firms (3.29) or African American owned firms (2.87). [p=.083; Eta Squared =.031] Full Time Year Round Employment Levels The following tables compare full time year round employment levels for minority and non-minority businesses. While some of the comparisons appear to be different, such as services last year, the high variability in the data (i.e. wide range of employment sizes) prevented the findings from being statistically significant. Services employment next year did show a significant difference at the 94 percent confidence level (2.54 for minority firms versus 5.93 for non-minority firms on average). Next Year Total Employment Agriculture/fishing Construction Manufacturing Wholesale/Transportation Retail Services Financial All Firms Last Year Full Time Employment Agriculture/fishing Construction Manufacturing Wholesale/Transportation Retail Services Financial All Firms

18 Full Time Seasonal Employment Levels Full time seasonal employment typically runs between 0.30 and 0.60 jobs per firm. Averages for full time seasonal employees were statistically similar between minority and non-minority firms, as the following tables demonstrate. Minority construction companies tend to have more jobs in this category, which were statistically significant for next year s level (see last table). Current Full Time Employment Agriculture/fishing Construction Manufacturing Wholesale/Transportation Retail Services Financial All Firms Next Year Full Time Employment Agriculture/fishing Construction Manufacturing Wholesale/Transportation Retail Services Financial All Firms Last Year Full Time Seasonal Employment Agriculture/fishing Construction Manufacturing Wholesale/Transportation Retail Services Financial All Firms

19 Part Time Year Round Employment Levels Part time year round employment averages between 1.0 and 1.5 jobs per establishment. The only difference by minority status that was large enough to be statistically significant was for manufacturing firms in the last year, where minority businesses employed slightly more part time workers (.94) than did other firms (.23). However, the employment levels were statistically the same for manufacturers in the next year (p=.922) as the non-minority firms expect to catch up in their staffing for part-time workers with around 1 person. In general, minority-owned manufacturing firms in the statewide sample tended to be larger on average than non-minority firms, and this is reflected in higher average employment across the categories of staff measured. Current Full Time Seasonal Employment Agriculture/fishing Construction Manufacturing Wholesale/Transportation Retail Services Financial All Firms Next Year Full Time Seasonal Employment Agriculture/fishing Construction Manufacturing Wholesale/Transportation Retail Services Financial All Firms Last Year Part Time Employment Agriculture/fishing Construction Manufacturing Wholesale/Transportation Retail Services Financial All Firms

20 Part Time Seasonal Employment For part time seasonal employment, the only significant differences by minority status were in the construction sector, where minority firms generally had more employees than non-minority firms, both for last year and the current year. Further analysis did not detect significant differences by type of construction firm. Current Part Time Employment Agriculture/fishing Construction Manufacturing Wholesale/Transportation Retail Services Financial All Firms Next Year Part Time Employment Agriculture/fishing Construction Manufacturing Wholesale/Transportation Retail Services Financial All Firms Last Year Part Time Seasonal Employment Agriculture/fishing Construction Manufacturing Wholesale/Transportation Retail Services Financial All Firms

21 Current Part Time Seasonal Employment Agriculture/fishing Construction Manufacturing Wholesale/Transportation Retail Services Financial All Firms Next Year Part Time Seasonal Employment Agriculture/fishing Construction Manufacturing Wholesale/Transportation Retail Services Financial All Firms Revenues Gross Revenues Last Year Statewide Minority and non-minority owned businesses reported statistically similar gross revenues in the last year (p=.707), averaging $485,612 for minority owned firms and $469,426 for other businesses. As the following line chart shows, there is a great deal of variability in company sizes, from the 21-26% of firms that make under $50,000 per year to the 2-3% of firms grossing $4 million or more. The standard deviation in sales was approximately twice that of the mean average revenues ($935,275 minority and $1,005,371 nonminority), pointing to a disproportionate impact on the mean from the small segment of larger revenue companies. The measure of Kurtosis was strongly positive for both groups (20.88 minority, non-minority), indicating more of a peaked, rather than flat, distribution overall. The concentration of firms with less than $100,000 income helps explain why the Kurtosis was positive even though the rest of the distribution was generally flat or segmented. These results are consistent with the actual distribution of businesses sizes statewide, with a large percentage being small or home businesses. 14

22 30.0% Revenues Last Year 25.0% 20.0% 15.0% 10.0% Minority Non minority 5.0% 0.0% Under $50,000 $50,000 - $99,999 $100,000 - $149,999 $150,000 - $199,999 $200,000 - $249,999 $250,000 - $299,999 $300,000 - $349,999 $350,000 - $399,999 $400,000 - $449,000 $450,000 - $499,000 $500,000 - $549,999 $550,000 - $599,999 $600,000 - $649,999 $650,000 - $699,999 $700,000 - $749,999 $750,000 - $799,999 $800,000 - $849,999 $850,000 - $899,999 $900,000 - $949,999 $950,000 - $999,999 $1.0 - $1.19 million $1.2 - $1.39 million $1.4 - $1.59 million $1.6 - $1.79 million $1.8 - $1.99 million $2.0 - $2.49 million $2.5 - $2.99 million $3.0 - $3.49 million $3.5 - $3.99 million $4.0 - $4.49 million $4.5 - $4.99 million $5.0 million + Gross Revenues This Year Statewide The shape of the distribution of company sizes was similar between the previous year and the current year, shown below. As was seen in the previous year results, minority and non-minority owned businesses reported statistically similar gross revenues for the current year (p=.804), averaging $542,357 for minority owned firms and $544,610 for other businesses. Once again, there is a great deal of variability in company sizes. The standard deviation was $1.2 million for non-minority and $1.0 million for minority firms and the Kurtosis was 21 and 48, with non-minority firms having the higher level, meaning more peaked distribution. On average, revenues for minority owned firms grew from $485,612 (last year) to $542,357 currently, or an 11.7% increase. This compares to a somewhat larger nonminority firm increase of 16.0%. The strong increase in minority owned business revenues is an important finding and reflects the improved health of small businesses overall in Washington State. 15

23 30.0% Revenues This Year 25.0% 20.0% 15.0% Minority Non minority 10.0% 5.0% 0.0% Under $50,000 $50,000 - $99,999 $100,000 - $149,999 $150,000 - $199,999 $200,000 - $249,999 $250,000 - $299,999 $300,000 - $349,999 $350,000 - $399,999 $400,000 - $449,000 $450,000 - $499,000 $500,000 - $549,999 $550,000 - $599,999 $600,000 - $649,999 $650,000 - $699,999 $700,000 - $749,999 $750,000 - $799,999 $800,000 - $849,999 $850,000 - $899,999 $900,000 - $949,999 $950,000 - $999,999 $1.0 - $1.19 million $1.2 - $1.39 million $1.4 - $1.59 million $1.6 - $1.79 million $1.8 - $1.99 million $2.0 - $2.49 million $2.5 - $2.99 million $3.0 - $3.49 million $3.5 - $3.99 million $4.0 - $4.49 million $4.5 - $4.99 million $5.0 million + Gross Revenues Industry Level Differences by minority status were not significant at the industry level for gross firm revenues. Washington State business establishments averaged $469,000 - $486,000 per year last year and expect steady growth this year and next year. Kurtosis levels were generally positive and ranged from 1-47, due to the concentration of firms in the lower revenue categories. Gross Revenues in the Last Year (2006) Gross Revenues Estimated This Year (2007) Non- Minority S.D. Kurtosis Minority S.D. Kurtosis Sig. (p= ) Agriculture/fishing $492,727 $1,182, $298,829 $680, Construction $603,832 $1,108, $1,048,928 $1,711, Manufacturing $546,047 $858, $872,267 $1,263, Wholesale/Transportation $693,483 $1,041, $1,051,484 $1,699, Retail $296,948 $618, $393,882 $426, Services $322,379 $488, $287,014 $406, Financial $1,053,637 $2,290, $877,307 $1,367, Weighted Average $ $1,005, $485,612 $935, Non- Minority S.D. Kurtosis Minority S.D. Kurtosis Sig. (p= ) Agriculture/fishing $487,472 $1,166, $315,588 $682, Construction $636,785 $1,115, $1,096,190 $1,744, Manufacturing $680,203 $1,169, $1,048,780 $1,659, Wholesale/Transportation $764,047 $1,122, $1,201,596 $1,933, Retail $379,734 $722, $450,191 $451, Services $363,314 $616, $322,962 $426, Financial $1,337,349 $3,018, $877,307 $1,426, Weighted Average $544,610 $ $542,357 $1,033,

24 The percentage expected change in revenues ( ) was virtually identical between minority and non-minority companies, at 17.8%. Differences between the two groups in the size of segments with different growth rates were not significant (see following table). Wholesale and financial firms that were minority owned tended to have higher rates of growth (see second table below). Firms Segmented by Amount of Growth Expected Percent of Firms None or negative 1-4% 5-19% 20%+ All Companies Non-minority 22.9% 6.5% 37.2% 33.3% 17.8% Minority 15.4% 8.9% 42.0% 33.7% 17.8% p =.247 Note that revenues expected for the next year were calculated based on percentage change amounts that were estimated by respondents (shown on the next page). Thus, the following revenue figures were estimated using these change amounts applied to the current year base level. Expected Growth Rate in Revenues Agriculture/fishing 10.96% 11.59% Construction 19.42% 21.45% Manufacturing 19.97% 19.77% Wholesale/Transportation 12.74% 23.47% Retail 20.02% 14.99% Services 20.98% 17.42% Financial 6.47% 22.25% All Firms 17.76% 17.79% Estimated Gross Revenues Next Year (2008) Agriculture/fishing $540,899 $351,049 na Construction $760,448 $1,331,323 na Manufacturing $816,039 $1,255,406 na Wholesale/Transportation $861,387 $1,483,610 na Retail $455,757 $517,675 na Services $439,537 $379,222 na Financial $1,423,876 $1,072,508 na Weighted Average $629,532 $646,362 na *Note: Calculated variable 17

25 Further Analysis by Ethnic Group As with employment, Asian-owned firms generally had higher revenues in the last fiscal year. The average Asian owner reported $745,733 in sales, compared to $344,914 among African American firms and $273,356 among Hispanic firms. [p =.027; Eta Squared =.065] Verbatim Responses Owners were asked a verbatim question about why their revenues had changed. An analysis of the responses revealed the following: Reasons for Lower Revenues A wide range of answers were given for why revenue had declined, including the following frequent responses: Weaker demand in the market Lower priced competitors increasing market share Housing industry slowing Weather problems Health issues for owner Reasons for Higher Revenues The following is a list of common responses for why revenue has increased: More customers/clients Stronger/growing demand in the market Raised prices/passed along increases in costs Better advertising/pr Using the Internet New equipment purchased Introduced new products or services Note: The verbatim responses were similar for minority and non-minority firms. Profits Net Profit - Overview Net profit was also statistically similar overall between minority owned and non-minority owned firms. There were some apparent differences in some industries, but factoring in the variability in the data and smaller sample sizes in most cases they were not large enough to reach statistical significance. Two exceptions were wholesale and services companies, where profits were significantly higher among minority owned firms. It has been shown elsewhere in this report that minority owned firms face obstacles such as a hesitancy on the part of lenders to extend credit, and they have a lower incidence of making regular financial statements. Given this, the strong profitability of minority owned businesses might seem contradictory. 18

26 However, a review of the literature showed evidence that on a national basis minority firms have been growing faster than their non-minority counterparts over the last decade and have also experienced higher growth in profits. Dun & Bradstreet reported in 1999 that women and minority owned firm revenues were growing rapidly, including spectacular growth of revenues among Hispanic and Asian owned firms. 5 The Kauffman Foundation found that while the average investment per firm to minority owned businesses was $562,000, the average net return to investors was $1,061, Venture capital investments in minority firms grew from several million in the early 1990 s to well over $1 billion currently. The Milken Institute reported in 2000 at the final peak of the dot.com boom/bubble that minority firms had been growing 3 times faster than non-minority firms in sales even though they were not heavily represented in the fast growth sectors like software and IT. 7 In the last year, businesses reported net profits of around $65,000, with little difference between minority and non-minority owned firms at the statewide level. Net Profit Last Year Statewide The following line chart displays the distribution of profits among minority and nonminority firms statewide, which are statistically similar (p=.861). As with business revenues, there is a fairly large segment of companies that reported profits of less than $100,000, and a very small percentage of firms reporting profits up to $4 million. There was generally a high degree of variability in the distribution of non-minority firm profits, with the standard deviation being more than twice the overall average. Non-minority firms had a higher standard deviation (see table in next section) but this was skewed somewhat by a large variability in the financial sector. The measure of homogeneity, or kurtosis, showed a high level consistent with the normal concentration of firms in the smaller company sizes % Net Profit Last Year 80.00% 70.00% 60.00% 50.00% 40.00% Minority Non Minority 30.00% 20.00% 10.00% 0.00% Under $50,000 $50,000 - $99,999 $100,000 - $149,999 $150,000 - $199,999 $200,000 - $249,999 $250,000 - $299,999 $300,000 - $349,999 $400,000 - $449,000 $500,000 - $549,999 $750,000 - $799,999 $3.5 - $3.99 million 5 (July 2007). 6 Kauffman Foundation, Minority Research Highlights, (July 2007). 7 Yago, Glenn and Aaron Pankratz. Sept 25, The Minority Business Challenge: Democratizing Capital for Emerging Domestic Markets. Santa Monica, CA: Milken Institute. 19

27 The next chart below displays the distribution of companies by current net profit. The shape of the distribution, variability and degree of homogeneity were similar to the results from last year s profits (see overall figures in next section) % Net Profit This Year 70.00% 60.00% 50.00% 40.00% Minority Non Minority 30.00% 20.00% 10.00% 0.00% Under $50,000 $50,000 - $99,999 $100,000 - $149,999 $150,000 - $199,999 $200,000 - $249,999 $250,000 - $299,999 $300,000 - $349,999 $350,000 - $399,999 $400,000 - $449,000 $500,000 - $549,999 $600,000 - $649,999 $750,000 - $799,999 $4.0 - $4.49 million Net Profit Industry Comparisons Looking at individual industry segments, the only industry-level difference that was statistically significant was wholesale/transportation firms where minority firms were much more profitable on average (p=.087). Based on the standard deviation, there was more variability in the data among non-minority firms. Manufacturing firms as a sector had the highest Kurtosis values, indicating profits were much more homogenous or concentrated than normal. Net Profit Last Year (2006) Non- Minority S.D. Kurtosis Minority S.D. Kurtosis Sig. (p= ) Agriculture/fishing $ 27,148 $39, $ 16,724 $ 22, Construction $ 38,607 $41, $ 73,685 $ 110, Manufacturing $ 24,960 $48, $112,500 $ 419, Wholesale/Transportation $ 30,726 $63, $156,971 $ 284, Retail $ 22,328 $25, $ 33,824 $ 37, Services $ 34,936 $50, $ 49,408 $ 50, Financial $ 394,535 $1,010, $141,621 $ 196, Weighted Average $ 64,965 $324, $ 34,472 $ 152, Over the current year (2007) there were again no differences based on-minority status when the entire sample was analyzed. Minority owned wholesale firms again reported significantly higher profits than did non-minority firms. The same patterns were seen in 20