Calif. Small Business Owners Optimistic About Growth, UBOC Survey Says

February 23, 2005

Almost 71 percent of California small business owners polled are expecting 2005 to be an overall better year than 2004, according to the fifth annual statewide survey released today by Union Bank of California, N.A. The survey’s results also offer good news for California workers, as about 36 percent of small business owners anticipate their staffing levels to increase in 2005, and only 3 percent of respondents reported having plans to lay workers off this year.

The survey showed improvement in 2004 over 2003 in the number of actual layoffs. The percentage of respondents that laid off employees during the previous year for economic reasons dropped from about 10 percent in the 2004 survey to about 8 percent in 2005. Business owners are also keeping jobs in California, as only 3 percent said they had shifted any of their operations or positions to a foreign country in 2004.

However, the cost of workers’ compensation insurance continues to plague California business owners, despite an overhaul of the system in 2004. It was the chief concern cited among respondents in the 2005 survey; nearly 66 percent listed workers’ compensation insurance as one of their three biggest concerns about being a California small business owner. This is slightly higher than what was recorded in the 2004 survey. In fact, 92 percent of business owners said their workers’ compensation insurance costs remained the same, or increased last year. Of the 8 percent who reported a drop in their premium, about 39 percent said that their premium was lowered by less than 10 percent.

The next two biggest concerns were the state of the California economy (nearly 37 percent) and the cost of providing health care benefits (nearly 34 percent). However, although the state economy is still the second biggest worry, the percentage of respondents who listed it as a challenge dropped from almost 45 percent in 2004.

Respondents were also asked to identify the principal advantages of owning a business in California: Opportunities for growth (29 percent), family ties (20 percent) and the climate (18 percent) proved to be the top three reasons for staying in the state.

“Small business is the engine that powers the California economy. As a group, small businesses account for roughly half of California’s employment and most of the new business formations and employment growth in recent years,” said Richard C. Hartnack, Union Bank vice chairman and first vice chairman of the California Chamber of Commerce. “Every year Union Bank of California asks businesses what they are thinking — are they confident in the future, are they planning to expand, to hire more people. We also want to know what worries them so we can develop products that meet small businesses’ needs, but also inform policy makers about the concerns of small business.”

According to California Insurance Commissioner John Garamendi, “The recent reforms passed by the legislature have not yet been fully realized by California small businesses. In order to keep our current businesses, and attract new ones, we must provide a predictable and stable system. The results of this survey show that we still have more to do,” he said.

Last month, Union Bank surveyed more than 1,900 small business owners statewide. Respondents were asked questions regarding their company’s sales performance, hiring plans, health benefit costs and other financial and economic issues. For this survey, small businesses were defined as California companies in operation for at least two years, with annual sales under $5 million for the fiscal year 2004.

“The survey’s results show that small business owners are becoming increasingly optimistic, as the state’s economy finally gained traction in 2004,” said Keitaro Matsuda, Union Bank of California senior economist. “They appear to be preparing for future growth now, as they are planning to boost their capital investment, build up inventories and increase the square footage of their real estate. This is a shift from more defensive strategies of the past several years.”

About 64 percent of business owners surveyed reported greater sales in the fourth quarter of 2004 over the same period in 2003, with 23 percent reporting the same sales and 14 percent with lower sales. In addition, 42 percent of respondents have capital expenditure plans in 2005, and of those, 71 percent plan to spend more than what they did in 2004. About 19 percent of firms plan to increase the square footage of their real estate.

The business owners were also asked if they planned to retire in the next five years, and while only 15 percent responded yes, 37 percent reported having a succession plan in place for their business. About 26 percent of the respondents reported having named a successor for the business as well. According to the University of San Diego Family Business Forum, only about 30 percent of family-owned small businesses survive the transition to the second generation, while less than 10 percent survive the transition to the third generation.

Providing health care insurance to employees remains a challenge for business owners. Half currently offer health benefits, and of those, 20 percent said they shifted a higher portion of health care costs to their employees last year; 10 percent reduced health benefits. In addition, only about 27 percent of respondents said they offer their employees a retirement plan, such as a 401(k) plan or employee stock ownership plan (ESOP).

Other survey results showed that 56 percent of respondents purchased or upgraded technology applications for their businesses, and of those, 34 percent spent more than $10,000 in 2004.

Survey Methodology: From Jan. 10 to Jan. 21, 2005, Union Bank of California’s Small Business Division conducted face-to-face interviews with 1,941 small business owners.

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