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National Restaurant Association - Is entrepreneurship at risk?

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Is entrepreneurship at risk?

Entrepreneurship in the U.S. has declined steadily over the past three decades, and the rate of business closings has now surpassed the rate of business openings, according to a recent study by the Brookings Institution.

The report doesn’t give specific reasons for the trend but notes that the decline isn’t limited to particular sectors or regions.  The Brookings study looked at “business dynamism,” or the process by which businesses are launched, closed, expanded and contracted, and found that the firm entry rate—businesses less than a year old as a percentage of total businesses—fell by nearly half between 1978 and 2011.

“Business deaths now exceed business births for the first time in the thirty-plus-year history of our data,” the Brookings study stated.

Two restaurant operators who reviewed the findings said they weren’t surprised, and pointed to increasing regulatory pressure as an obstacle that’s discouraging potential entrepreneurs.

“I think what happens is, especially when young people are trying to take that first step, it’s becoming more discouraging when you see all the hoops people have to jump through that we didn’t have to go through when I started in the 1970s,” said Danny Sumrall, owner of The Half Shell restaurants in Memphis. “You have the Affordable Care Act, taxes, you have ways you have to ensure employees are citizens. It’s a nightmare.”

Compliance and taxes add to the cost of doing business, which also could make startups less attractive to lenders, Sumrall said. “You’ll go to the bank to get the initial loan, and your business model has to be profitable,” he said. “If you’re showing minimal profit, most banks aren’t going to want to sign on the dotted line. If they don’t, where will you get the funds?”

Jeff Ecker, corporate general manager of Paymon’s Mediterranean Café & Lounge in Las Vegas, said he’s concerned that business failures might prevent entrepreneurs from trying to start other businesses.

“A lot of first-time businesspeople don’t understand what they’re getting into,” he said. “Many wind up surviving, even at a loss, but they stay in business to avoid ruining their credit. The small business doesn’t have the luxury of Chapter 11. Their credit could be ruined and prevent them from getting back into business.”

The Brookings report noted that the latest data used in the study is from 2011, and it’s possible that some of the negative trends have reversed or stabilized since then.

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