Business Challenges in 2007

What challenges will 2007 hold for your business? Nobody knows for sure, but our 2nd annual "Entrepreneurial Challenges Survey" gives you a glimpse into what entrepreneurs like yourself are anticipating.

Larry Dietrick is smiling--and why shouldn't he be? Scientel Wireless, his 22-person Lombard, Illinois, company, grew from $3.2 million in 2005 sales to $4.2 million in 2006 sales. "It's a spectacular business right now," says the 48-year-old entrepreneur, who designs and builds wireless broadband networks for cities and public agencies. "There's a lot of interest in the market."

Yet behind the president and co-founder's cheery outlook are significant concerns. A talent shortage has him doing back flips to hire qualified employees. Health-care costs keep climbing, making it more difficult for Scientel to match larger employers' compensation deals. "It's often hard for us to compete in the benefits package," Dietrick says. Even when the company does find a good hiring match, other issues can snag the deal. "We did hire one individual, [but we] had to go through a rather lengthy immigration issue."

Dietrick's optimism--and his concerns--are widely shared, according to Entrepreneur magazine and PricewaterhouseCoopers' second annual "Entrepreneurial Challenges Survey." While 66 percent of the entrepreneurs we contacted in the third quarter of 2006 were optimistic about the U.S. economy, finding and retaining qualified employees was most often cited as the single most pressing challenge businesses will face in 2007.

"The demand has never been higher for good employees; that's true across the board," says J. Fentress Seagroves, partner in PricewaterhouseCoopers' Private Company Services practice in Atlanta. "It is one of the key drivers of value and clearly the cornerstone of competitive advantage today." In terms of M&A, Seagroves says that employees and managerial talent are often the critical drivers in transactions, especially when acquiring companies are seeking access to local knowledge and contacts to help them expand to overseas markets such as China.

While Seagroves recognizes the challenge of finding talent, he says the overall tone of the entrepreneurial response was positive--and that the positive outlook of entrepreneurs itself bodes well for growing businesses. "It's meaningful because confidence is a critical indicator of current and future economic activity," he says. "Positive and optimistic trends are always a good sign."

Look on the Bright Side
To acquire data for the 2007 "Entrepreneurial Challenges Survey," PricewaterhouseCoopers polled 281 fast-growth firms, including 125 product companies and 156 service providers. One hundred twenty-nine companies were in high technology, and 152 were nontechnology firms. Overall, the companies surveyed averaged 249 employees; 77 percent, however, had 100 employees or fewer. Average revenue topped 35 million, and the average surveyed company grew 211 percent in the past five years.

Direct comparisons with 2006's survey are difficult because some questions changed. But it seems entrepreneurs are generally more upbeat this year. Only 62 percent were optimistic about the U.S. economy last year (compared with 66 percent this year), and 29 percent were uncertain (compared with 25 percent this year). In another sign of a positive mood among America's entrepreneurs, those surveyed said they were not very concerned about inflation, taxes, immigration and the possibility of a real estate bubble bursting.

The pressing shortage of qualified workers repeated as the focus of business worries for 2007. Twenty percent of respondents predicted that finding and retaining qualified workers would be the single most important challenge of the year, edging out growing the business (18 percent) and coming in well ahead of sales, revenue and demand issues (11 percent). On the roster of challenges, the only other category that garnered a double-digit response was changing conditions in the economy (10 percent).

Staffing is easily the biggest problem facing her industry at the moment, says Lorraine Kay, founder and CEO of Kay Construction in Mount Laurel, New Jersey. "I have turned down work this year because I didn't feel I could find the right qualified help," says Kay, 56, whose 46-person company does $60 million a year managing commercial construction projects.

Growing his business is an area of emphasis for Michael McNicholas, 54, president and founder of Hialeah, Florida, steam boiler seller Enviro-Mechanical Inc. "In my business, there's only so much pie you can work with," says McNicholas, who employs 11. "The steam industry is not really growing." Faced with a stagnant domestic market, McNicholas has turned to foreign customers, who now make up 40 percent of the company's $3 million in annual sales.

Competition gets a lot of attention from Stephen Voudouris, CEO of online retailer Xoxide Inc., which he co-founded with his brother Andrew, 20, and Chris Francy, 23. Stephen, 22, started the Malvern, Pennsylvania, company when he was in high school and online retail competition was weaker. "Now we see three or four sites a week pop up doing the same thing we [do]," says Stephen, whose 35-employee company sells computer and car parts and other items through several e-commerce sites. In addition to increasing competition for customers, he says the growing number of rivals is causing the cost of online advertising to rise sharply.

Like many entrepreneurs, Stephen experienced double-digit percentage increases in his health-care plan premiums last year. That's just the latest in a long string of steep hikes in health-care costs, but entrepreneurs seem to be getting used to it. Only 28 percent listed rising health-care outlays as a wild-card factor that could upset the apple cart in 2007, down from 43 percent last year. Stephen, however, isn't used to it: "Maybe people are getting over it, but it still bothers us just as much."

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This article was originally published in the January 2007 print edition of Entrepreneur with the headline: A Look Ahead.

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