Not much has previously been publicly known about wealth amongst small business owners. Many business operators are often (quite naturally) reluctant to talk publicly about their wealth, or to participate in surveys and studies about the phenomenon. But some recent data collected over several years from both the Australian Bureau of Statistics and the Household Income and Labour Dynamics in Australia (HILDA) survey are starting to shed some light on the topic, by focusing on households where the main source of income is from owning and operating an unincorporated business, such as a sole trader or partnership venture. At the end of the 2009-10 financial year, there were about 635,000 sole proprietors and almost 355,000 partnerships actively trading in Australia.
Their responses are illuminating – especially when compared to households where the main form of employment was as a wage or salary earner.
As many people would suspect, business-owning households don’t necessarily take home outlandish amounts of cash each week. In fact, as Table 1 below indicates, they actually earn less than their salaried counterparts – and have been consistently doing so for several years.
[table id=1 /]
But when it comes to accumulating assets and building wealth, small business owners clearly outpace wage and salary earners. Table 2 shows the mean net worth of both types of households during much of the last decade. Small business households have accumulated substantially more net assets than wage earners: in 2009-10, for example, small business households reported net assets of $1.095 million, compared to just $0.673 million for a salary-earning residence. And, as the table also shows, wealth accumulation is growing faster amongst small businesses than employees. Over time, the difference between the two groups has increased.
[table id=2 /]
Another interesting trend is the apparent closure of the superannuation gap between the two household sets. Once there was a substantial difference between the two groups, with employees putting much more money into their super than business owners. However, the superannuation assets of both groups are now roughly equal. As a result, superannuation is now a major asset for business owner households. This may be due to a number of different causes, but one major reason is likely to be increased contributions to super by business owners. Whereas many entrepreneurs traditionally relied on the ultimate sale or disposal of their business to fund their post-working life needs (giving rise to the slogan “my business is my superannuation”), this appears to have changed in the last decade.
Table 3 indicates this dramatic increase. In 2003-04, wage earner households had mean superannuation of $76,900 whilst business households held only $55,700 – a 38 per cent differential. However, by 2009-10, employee households held $123,200 in superannuation, and business households some $118,200. The difference between the two cohorts had shrunk to only four per cent.
[table id=3 /]
No doubt the emergence of self-managed super funds has been a major contributor to this growth. Not shown in the table is the fact that business households tend to hold their superannuation assets in different schemes: they are more likely to be held in private, industry or SMSF funds than wage and salary earners. This is not surprising – after all, the number of self-managed super funds grew from 270,000 in June 2004 to more than 410,000 by June 2010. And many small business owners value the independence and freedom of choice which an SMSF gives them, even if it also means they will need more ongoing professional advice to support them in the management of such funds.
So are business owners wealthier than paid employees? On the evidence collected in the ABS and HILDA surveys, the answer would appear to be “yes”. Although such households may earn a little less cash each payday than their employed counterparts, overall they emerge wealthier, with more assets. This is perhaps appropriate, given the higher risk that comes with operating your own business venture.
Such trends will have an impact on accountants. These business owners will need increasing access to advice that goes well beyond the usual functions of recordkeeping, compliance and strategic management accounting input for their firms. They will need advice also about their personal (not just business) circumstances: how to best structure their assets, how to protect them in future, and how to grow them over time.
Some other aspects of wealth between the two groups of households have also been noted in these studies, but are not discussed in detail here. For example, business owner households continue to hold more assets in the form of business equity, and the assets of employee households are more liquid than business households. Notably, both types of households also hold roughly similar levels of liabilities.
Such studies have their limitations, of course. Not all small businesses survive, and even many of those that do earn only a small return. Moreover, the data discussed above only relates to households that operate an unincorporated business, and so doesn’t take into account directors of companies. Nevertheless, one thing is clear: there’s now a significant cohort of small business owners building considerable wealth for themselves. The challenge now for the accounting profession is to provide the services and skills that these owners need to protect and consolidate their wealth into the future.
Scott Holmes, Mark Sargent and Nadine Barry are based at the University of Newcastle; Michael Schaper is an Adjunct Professor at Curtin University. For more information: scott.holmes@newcastle.edu.au
