Part Two – Rethinking Business Types-Marginal or Troubled Businesses
It is common practice when talking about market studies or zoning to think about business categories in a specific way, usually broken down as retail, commercial, and industrial. This categorization is useful in many ways, but there is a better way to think about business when making a determination of which businesses will be financially successful and which will have a long-term positive impact on the communities in which they operate. As a banker, it didn’t take me very long to come up with a totally different classification system based on long-term business viability. I broke businesses down into the following categories:
- marginal or troubled businesses
- static businesses
- growth businesses
As a lender I needed to find and identify the growth businesses. They were my best bets for making loans to customers with the ability to repay.
Marginal businesses are businesses with problems which seem insurmountable without some kind of financial assistance. The problems may be caused by poor management, changes in economic conditions, changes in local conditions, lack of access to capital, etc. The key commonality is that the management seems to be stuck yet unwilling to make significant business changes. This is a fairly harsh assessment, but I think a key one for Economic Development Professionals to make. Applying the old 80/20 rule these types of businesses are likely to be 80% of demand for services, but only 20% of them will be successful in turning their businesses around. Municipalites and Economic Development Professionals need to do a strict cost/benefit analysis when providing services to these types of businesses.
There is a fundamental difference in mindset of the entreprenuer who will turn the business and the entreprenuer who will always be on the edge of disaster. One is forward thinking and one continually second guesses the past. I want to compare two retail owners and their response to the economic downturn of early 2001. Both had multiple retail locations. One took the opportunity to close down her poorest performing location and write off the loss over the next ten years. The other could not make a decision and kept second-guessing her long-term commitment to keeping the business running. She wondered if she should have closed all her locations five years ago, or ten years ago, or fifteen years ago, but could not bring herself to make any current changes to the way she ran her business. In the end, she also lost one of her locations, but at a much greater financial loss. Business at her remaining location is still struggling. The first entreprenuer has been able to expand her business and even though growth is slowed in the current economy she has a stronger capital base to see her through.
It is likely in your community that the second business owner will be the one asking for some form of help, for instance TIF financing. The first business owner may never ask for help. If the first were located in a TIF district, TIF returns could be used to enhance the amenities in the district rather than to shore up the viability of the business owner. This would have a measurably greater positive impact on the downtown district.