The Big Issues for Small Concerns

By Lori Ioannou

Call them the forgotten majority: America's small businesses. This element of the U.S. economy is probably the most misunderstood in the land--from Madison Avenue to Washington--because it's such an eclectic and disparate group. It ranges from venture capital-backed dotcoms to mom-and-pop retailers to family-owned manufacturers. But they all seem to agree on certain things: taxes are too high and too complicated, health insurance is too expensive, and politicians--especially those inside the Beltway--should just go to you-know-where.

In the past, Washington has largely ignored such views, but this year seems different. "During this presidential campaign, candidates are at least acknowledging the plight of small-business owners by introducing some policies on health care and taxes," says Dennis Whitfield, senior vice president of the National Federation of Independent Business in Washington.

With that in mind, we decided to go to small-business owners and ask their views on the major issues of the day--and how they would like the all-but-anointed presidential candidates, George W. Bush and Vice President Al Gore, to address them. FSB (FORTUNE Small Business) assembled its first CEO round table at the Four Seasons Hotel in Chicago in May. Participants included nine business owners from the Chicago area representing a cross section of industries: Len Batterson, a founder of AOL and now chairman and CEO of Vcapital.com an online venture-capital marketplace; Paul Cooper, CEO of Perceptual Robotics, a maker of video software for the Web; Andrew Cory, president of Cory & Associates, an insurance brokerage and employee-leasing firm; Keith Hasty, president and CEO of Best Foam Fabricators, a family-owned manufacturer of foam for the auto industry; Leticia Herrera, CEO of ECI Inc., a restoration and maintenance company; Kevin Kerns, president of Apropos Technology Inc., a maker of software for managing e-mail, voice and Web content; Tom Schroeder, a self-employed lawyer; Max Suzenaar Jr., president of Minding Your Business, an event-planning company; and Dan Zigulich, president and executive producer of Z Group Films Ltd.

Excerpts from the session:

What are the most important issues you would like the candidates to address?

Kerns: The No. 1 issue for me is the cost of skilled labor. There is a lack of talent for companies big and small in the technology area. Universities are not coming close to filling demand. As a result, wages are inflating, and we're going overseas to find talent. We need to create incentives to retrain the existing low-skilled work force and entice students to pursue education in these fields. That might mean introducing a more aggressive student-loan program or creating co-ops with companies to guarantee summer jobs to help students pay for loans.

Hasty: I face this too, and I believe we're being fooled in this economy. The gap is widening between the skilled and the unskilled. In Chicago I was surprised to learn that in certain inner-city communities, the unemployment rate is as high as 15%. In these areas you see a lot of despair, a lot of hopelessness, and I think it's because the economy is changing from a muscles-and-brawn type of economy to one that requires a lot more education.

Leticia, you're in the service sector. Do you have the same concerns?

Herrera: My biggest concern is taxes. After 10 years of building my business, I'm finally at the point that I'm making some profit. But guess what? I have to go and get a loan to pay my taxes. Maybe I should have done more advance planning, but still, there has to be something that helps small businesses with this dilemma.

Batterson: Yeah, I agree. Add to that the blizzard of tax forms you have to fill out and the additional taxes you have to pay local and state governments. There are just too many taxing agencies and entities for small businesses to deal with. I just had a shock earlier this year. We had a nice capital gain on an investment, and my accountant calls me and says, "Oh, guess what, the state of Illinois passed some new tax on capital gains that I never heard of and, by the way, that's going to be $70,000."

Schroeder: In addition to the tax burden that you both talked about, the burden of preparing all these various forms and tax filings on a timely basis is overwhelming.

Cory: Just to give you an idea how onerous this is, last year alone there were 37 new federal and state regulations that affected small businesses. It's a nightmare. You have to hire advisers and CPAs to help you. Then you have to pray they make no mistakes.

So what would you suggest to help solve the problem?

Herrera: A moratorium on certain taxes until a company is profitable.

Hasty: One possible solution is not to tax a certain base of equity. This would help start-ups a lot. It would help emerging companies reinvest cash back into their businesses and stimulate growth. For it to work, the Federal Government and probably the state governments would have to set some sort of cap or float ceiling noting where that tax would start and how it would rise. It would probably have to vary by industry, because some businesses are more capital-intensive than others.

Tom, you have said the so-called death tax is an issue you're tracking. Governor Bush has vowed to abolish it. (At press time, the U.S. House of Representatives had voted to kill it and was waiting for the Senate vote.)

Schroeder: The death tax is probably the single most poorly understood and inconsistently applied tax we've got in this country. It's really a tax on success, which I think is contrary to what the U.S. is all about. I mean, we want people to develop businesses, then pay income taxes as they go along and earn income. Then suddenly, at their death, after they've built this big successful company, Uncle Sam wants to take a piece of it. Family heirs often lose these business legacies because of the high taxes. And most don't do enough estate planning and are totally unprepared.

Batterson: I've been going through this in my own estate planning right now, and it is quite a shock. The numbers that you're going to have to pay in taxes range from 37% to 55%.

Considering all the tax burdens, do you feel the government is at odds with the little guy?

Cooper: Sometimes, but it also supports us as well. My company wouldn't be here today if I didn't get grants from an SBA [Small Business Administration] program called the Small Business Innovation Research program. It helped me pay for R. and D. to build a prototype. I can certainly tell you from personal experience that a little bit of money can make a huge difference early in a company's history. And similarly, we had some leverage in an investment round from a State of Illinois venture-capital fund. These programs are invaluable.

We know there are some mixed views of the SBA here.

Suzenaar: Trying to get SBA funding is an excruciating challenge, especially if you are a service business and don't have the tangible assets the agency is looking for. I couldn't qualify; I had to get a bank loan. There needs to be more support staff at the SBA to help people like me get through the bureaucracy and red tape.

Hasty: It can be difficult getting through the maze, but over the years I got good results out of the SBA. It helped us diversify. Up until 1990, the defense industry accounted for 95% of our business. Then the SBA came out with a program that helped defense contractors like mine move into the private sector by providing low-interest loans.

Zigulich: I get chills when I hear others around this table say the government should come up with a scheme to help start-ups with their taxes. The last thing I want is more government intervention. I've got to a point that when I receive any mail from the government, I just put it in an envelope and send it to my accountant or my attorney. I don't even open it.

Hasty: I think the real role the government can have with small business is in the area of health care. Family coverage for our 95 employees is $7,000 a year each. The insurance companies claim that they need it because of the rising cost of health care. That may be true, but I think government can help control those costs. The expense is suffocating a lot of people.

Does everybody agree?

Suzenaar: I think it's an immediate concern, because to be competitive you have to provide health-care benefits even though you run a small company. And it's tough. I had an experience two years ago that demonstrates the point. One of our employees had a terminal illness and became eligible for insurance. But after the paperwork was submitted, we were advised by our insurance broker that the premiums might go up more than 300%. Obviously, such an increase could break a small company like mine.

Do you think the candidates are tackling the health-care issue?

Batterson: I think after Hillary Clinton got slaughtered over health care, everybody's just tiptoeing around all this stuff. I don't see any really hard, effective proposals that are going to change this system and make it work.

Recently Bush announced his New Initiative Plan, which proposed association health plans. These AHPs would be offered through trade associations and have national bargaining power.

Batterson: It's really just more alphabet soup. Look, all I would need is a major medical plan that I could get at a reasonable cost. And then if my employees needed some other benefits to cover the hangnails, we could give them that in additional salary and compensation, and they could handle it. I think it could be really simple.

What about medical savings accounts? It's a way for you to put money aside, almost like an IRA, and then you use that money to buy the health care that you need. Is anyone using them?

Batterson: I'd like to switch our whole firm into medical savings accounts right now, because that's the closest thing I can find to major medical. But I can't, because a couple of people have pre-existing conditions. I'm afraid those conditions won't be covered if we make the switch, no matter what they tell us.

Hasty: I think the real issue is on the cost-containment side. I'm not one for national health care, but I think that something has to be done or else we're never going to get a handle on this problem. I think the government has been afraid to step into this health-care industry and try to contain those costs so the average person can afford health insurance.

Next topic: minimum wage. Is this a concern to anyone here?

Hasty: This is one of these issues where I believe the market should dictate what the minimum wage is. With unemployment the way it is in this country, people compete for labor right now. And that's going to drive those rates up. It's all about supply and demand.

Batterson: That's some old labor-union issue that really doesn't exist anymore.

Zigulich: Do you feel optimistic about the economy?

Batterson: I feel fairly good. I'm a little concerned that interest rates may tick up more. That could cause the stock market to decline further, which is not good for the investment business.

Schroeder: One plus is that we've had political gridlock over the past eight years. It actually has proved to be a good thing, since it has stopped the government from interfering with growth in the economy.

Cooper: Well, as the technology guy at the table, I have to say I'm feeling darn great. Technology is playing a huge role in the future of the country, and it looks like it's just a major engine.

Herrera: I know that we're taking steps in the right direction. I think it has proved to be a great period for women in business.

One indicator of economic well-being is the availability of capital. Do you feel there's a glut of money available now for entrepreneurs?

Batterson: Well, as the venture capitalist here, I guess I ought to comment on this. You know, there's more private venture capital now than at any other time in the history of the country--about double what it was two years ago. So there is a tidal wave of so-called angel money sloshing around the country now to help people get started.

Does anyone have any thoughts about export policy, how much things like the North American Free Trade Agreement have helped small businesses?

Hasty: You know, it has really affected certain industries hard, because a lot of manufacturing has moved to Mexico. What's happening is that unskilled jobs are moving out of this country fast. Which leads us to the question, What do we do with the unskilled work force until they are trained to do technology jobs?

Batterson: What the Internet really is going to do is create a global economic revolution. Today if you're an Internet company in Chicago, you're basically an international company whether you want to be or not. And it's much easier to be, because of the communication links that the Internet provides. That's true whether you're a company like mine that's providing capital worldwide or to people who are selling anything.

Looking back over the past decade, do you think any issues of concern for small business have been solved?

Hasty: Yes, I think that if we look over the past 10 years, this has been the greatest economic time this country has enjoyed. There are more new small businesses being created right now than at any other time in history. Venture capital is plentiful. Many of the incentives that the government provided have helped, such as the SBA lending programs. The reduction in taxes has been a catalyst. If you look at capital-gains tax rates now, they are the lowest that they've ever been. This has spurred business formation and growth. And even if you look at estate taxes, although they are a major penalty to individuals, they have been coming down.

One final question: Will it make any difference who's elected President this fall?

Zigulich: I don't think so.

Kerns: I do. Mainly because I believe if George Bush is put in office, it will change the general flow of capital made available to businesses. In general, the Democratic platform has spurred investment in the small-business sector over the past eight years by reducing bank regulation and lowering interest rates, so it's easier to get bank loans. Historically, raising money has been the biggest hurdle for small businesses in this country. The Republicans don't have a good track record in this regard. They have a tighter focus on fiscal restraint.

Batterson: I went on the Internet and pulled off some stuff about George Bush and Al Gore on their programs. I found out that the Small Business Survival Committee, a lobbying group that claims to have 50,000 small-business members, basically gave Governor Bush a B-plus for his small- business program and gave Vice President Gore an F.

I looked at both candidates' positions on their websites, just to see if I agreed with this group. Gore's platform, except maybe a little bit in high technology, is so vague that it's hard to tell if he has a clue about small business. Bush's is a little more specific, but again, a lot of his proposals are from an aerial view of 50,000 ft. They are on topics that really don't affect small-business people and entrepreneurs trying to start their own businesses.

Zigulich: That's true. Our mission is to be successful in spite of the barriers that are laid out by the government. It's difficult to overcome the challenges, but we have to.

This piece was written in coordination with FSB, a Time Inc. magazine that goes to more than 1 million small-business owners