The Little Engines of Growth

Small firms struggle with a plague of tough problems

Much of the business of America is small business. Some 55% of the U.S. labor force is employed by companies with fewer than 100 workers. During the past decade, two-thirds of all new jobs were created by such firms. TIME reporters recently visited several small businesses around the U.S. to learn how they are dealing with problems of energy, inflation and high interest rates. Reports on four firms:

A Love Affair with Laundry

Success in a small business requires any number of attributes, but perhaps the most important one is a love for the work. Bill McDaniel, 55, of Atlanta feels that way about the dry-cleaning business. He has tried his hand at half a dozen other jobs, but none has matched the satisfaction he derives from operating Bill McDaniel's Cleaners in Atlanta. Says he: "I am intrigued by the business. It is fast moving, and the time goes by quickly. In dry cleaning, you can really stay busy."

As a World War II sailor on board the oil tanker Nantahala, McDaniel washed his own dungarees in the boiler room and patted a crease into the legs. But his initial try at running his own dry-cleaning operation failed in 1972 because of the increasing popularity of wash-and-wear garments and the loss of two high-volume customers. After his business declined by $30,000 over three years, McDaniel was forced to sell out for $32,000. He had unsuccessful flings in real estate leasing and carpet cleaning, but then in 1975 he bought a second dry-cleaning shop from a friend who was operating it unprofitably. "I thought I was through with dry cleaning, but it was a bargain," he says.

McDaniel's shop, which is located next to an insurance office in a small shopping center, draws about 200 steady customers from nearby office and apartment complexes. Business has increased steadily in the past few years, thanks in part to the growing number of two-income families who have less time available for laundry chores. Last year McDaniel's Cleaners did a business of $130,000, up from $119,000 in 1979.

Rising costs are McDaniel's biggest concern. He tries to keep his overhead to a minimum by working long hours and closely watching the use of energy. McDaniel opens the shop himself at 7:30 each weekday morning and fires up the boiler that makes steam to press garments. By the tune a helper arrives at 8 a.m., McDaniel has already cleaned a 50-lb. load of clothes and hung them on hangers. His wife helps run the shop, working the counter and mending garments; and all three of their children have also worked there.

Despite skimping on salaries for himself and four nonfamily employees, McDaniel fears that his expensive equipment (cost of a new boiler: $9,800) will break down, forcing him to borrow money to stay in business. "If I had to replace anything, it would be very costly. And with interest rates as high as they are, I don't know if I could do it."

Nevertheless, McDaniel is determined to stay with the business he loves. That attitude can be seen in his attention for detail. For example, he disdains commercial spot removers and often tests two or three chemicals himself to remove difficult stains. Says he: "This is a personalized business. Individually owned dry cleaners do the best. You just don't work in those big chains like you do in your own plant."

Tied Up in Red Tape

Edwin Jones and Ronald Shaw contributed $80 each in 1978 to start Coastal Building and Solar in suburban San Diego. Operating out of Jones' wood-frame house and working twelve-hour days, the two men quickly built up their own re modeling business. By 1979 the company employed 15 part-time workers and had around $130,000 in business.

Establishing a new enterprise involves many unexpected problems. One difficult task for Jones and Shaw was finding qualified workers. They hired journeyman carpenters, plumbers and electricians, but often found that they did poor work. "We had people whose work passed the building codes but it just wasn't acceptable to us," says Jones. In one case, the concrete was poured incorrectly, while in another one a repaired gas line would not hold pressure.

Struggling with high raw material prices and energy costs was also difficult. The price of many building materials has soared in the past two years. A standard eight-foot two-by-four, for example, has jumped in price from 97-c- in 1978 to $1.92 last year, while the rental fees on dumpsters, which are large trash bins used at construction sites, almost trebled to $72 a month during the same period. But the two entrepreneurs found ways to cut costs. One gambit was to drive their 1958 International truck across the Mexican border to buy gasoline in Tijuana at 42-c- per gal.

By last summer, however, Coastal Building was almost out of business. The firm had fired all 15 employees, and was $34,000 in debt, including $6,000 to the Federal Government for back payroll taxes. Jones, Shaw and their once promising enterprise had become victims to bureaucratic rules and Government red tape.

The first problem the two faced was with building inspectors. One city official, for example, approved running the wood siding on a building all the way down to the ground, but then another official made the businessmen change it so that the siding did not touch the earth. An inspector forced Shaw to modify the support system for a gabled roof, but then when he used the same method on another house, a different inspector banned it. Complains Shaw: "The problem is that you can't get mad at a building inspector because you have got to work with those guys."

In an attempt to get new business, the two men submitted bids on ten remodeling projects of the Department of Housing and Urban Development. But during the three-or four-month delay in obtaining HUD approval, their costs skyrocketed because of inflation. The result: most of the profit on the jobs was lost.

In a perhaps fitting denouement to their company's slide, Jones and Shaw early this month went to the Internal Revenue Service office in San Diego to arrange payment for their remaining $1,619 in back taxes. When the two businessmen were informed that they had just ten days to pay, an angry Jones demanded to know why they had not been told of that earlier. The IRS clerk replied calmly: "Probably incompetence around here. It sounds like a lot of red tape, but that's the Government."

Profits Made to Measure

Ted Despos, 39, the son of a Greek immigrant tailor, is the embodiment of the American success story. He learned to cut and sew at his father's knee, and five years ago he opened his own tailoring shop on one of the busiest crosstown streets in Fort Wayne, Ind. He quickly discovered that there was a bonanza in alterations. Says he: "People had lapels on old suits altered for $35 each instead of paying thousands for a new wardrobe." The first year his shop was open, Despos did $95,000 worth of business. Today he employs his father as a tailor plus three apprentices, and the gross is up to $275,000.

The elder Despos had come to Fort Wayne after World War II to open a tailor's shop, and his son started in the trade sweeping the floor after school. "It was a while before my father handed me a knife and even allowed me to open seams," he recalls. Although he always wanted to run his own business, he and his father clashed. Thus after studying business administration at the University of Indiana, Despos became a stockbroker. But a few years later he was back helping his father in the afternoons after the market closed. Eventually he accumulated $3,000 in savings and was running his own shop. "Tailoring is a skilled trade with a lot of pride of workmanship," he says. "It is a great satisfaction to make a beautiful suit."

Prospects for Despos and his business are good. Six years ago he started selling custom-tailored men's suits for $300 to $600. Now some time-pressed customers order clothes over the phone, confident that he knows their fit and taste so well that he can pick out a fabric and get started on the garment before they need to come in for a fitting. But his ambitions go far beyond that. "I would like to get into clothing manufacturing on a limited scale," he says. He believes that he could profitably sell the same woman's skirt that goes for $150 to $175 in Fort Wayne department stores for $100 in his shop.

Despos' problem right now is that he urgently needs more working space. Clothes waiting to be altered lie in heaps on the floor, and the work flow is poor because his 1,400-sq.-ft. shop is so cramped.

He also needs more sewing machines. For six weeks he had to put up a sign declining new work. "If I don't expand, I'll have to decrease my business," he frets. "Our customers have been super about it, but I wonder if they won't go elsewhere."

Despos has already found a site for a bigger operation, an empty Amoco filling station half a mile from where he is now located. The total cost of moving there, including new machines and remodeling, would come to about $175,000. But Despos is finding that he cannot afford to borrow the money from his local banker. The Fort Wayne National Bank, where he has been a customer for three years, would have given him a mortgage last October with an interest rate somewhere between 13% and 14%. But the bank insisted on a 30% cash down payment and Despos could not afford it. The $52,500 cash outlay would have eaten up all the tailor's working capital. Since then mortgage rates have climbed to 16%.

Still faced with the need to move, Despos applied to the Small Business Administration for a $150,000 loan at 9.25% interest. A friend who used to work for the SBA in Washington, D.C., though, told the tailor that he had little chance of getting a loan. The reason: he is not a member of one of SBA'S priority groups--black, female, handicapped or a Viet Nam veteran.

Despos, therefore, continues to run his business in tight quarters, but his anger is mounting. Says he: "I don't really want a new Government program to help small businessmen. Yet it's so frustrating to know a larger clientele is there to be served if only the financial markets were not so bad."

Yankee Innovation Pays Off

The one-story, cement-block building that houses Black & Webster Inc. of Waltham, Mass., nestles in a wooded hollow, unspoiled by the soot of sprawling factories. From his white-marble-top desk, President Peter T. Webster, 41, can watch pheasants dart across the lawn. But the rustic setting is deceptive. Webster and his staff of 83 people, including six engineers and ten highly skilled machinists, turn out such space-age products as orbital riveters and vibratory feeders.

Like many small high-technology companies, B & W has parlayed astute innovation and aggressive marketing into rapid growth. In 1945 the firm started out manufacturing the valves used to mix soda water and syrup in Coca-Cola machines at soda fountains. Since then it has made machine tools for General Electric, R.C.A. and Texas Instruments. Between 1975 and 1979 business expanded by 25% annually.

But not last year. As towering interest rates and inflation clobbered the economy, B&W's sales grew by a disappointing 6%, to $6.2 million. Profits were off 60%. And during the final three months of 1980 the firm barely broke even.

The uncertainties generated by the current economic turmoil have trapped Webster in a tense guessing game. He must pick a price level low enough to stimulate new sales but high enough to cover soaring costs. In 1980 the prices of his raw materials, including steel and plastic, jumped anywhere from 7% to 20%. Says Webster: "Every decision has a bearing on the bottom line. During inflationary times my margin for error is erased."

At the top of Webster's worry list is the high cost of energy, and so he has sought a number of ways to cut fuel use. Since 1977 the company has invested $1,500 for ceiling fans to blow hot air down to the floor of the plant and $10,000 for a miniature computer that governs the heating and air-conditioning system to regulate air temperature for maximum energy efficiency. Even with these and other tough conservation measures, the firm's heating oil and electricity bills have gone up by 54% since 1977, to $37,000 a year.

High interest rates have severely slowed Webster's efforts to boost productivity through capital investment. Two years ago he spent $80,000 for a "machining center" that can wield up to 25 different tools while making B & W products. The firm is now large enough to use a second machining center, but the price has jumped to $150,000 in the past three years. Webster has delayed borrowing the money because his bank demands a staggering 20 1/2% interest. Says he: "I have to guess how soon I should go to the bank. If I wait too long because of interest rates, it's going to cost us business."

Despite his current troubles, Webster remains confident that his firm will not stay down for long. In fact, he boldly predicts a sales surge of 25% in 1982. His reason: members of the baby boom generation born in the '50s are reaching the age at which they buy houses and the major appliances to go in them. Many of those products will be made with his equipment. Says Webster: "Unless we really foul up the economy, expansion is inevitable." It is just that kind of optimism and vision that has made small businesses such powerful engines of growth. qed

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