THE BLOG

Private-company growth slowed in 2013

02/03/2014 02:02 pm ET | Updated Apr 05, 2014

U.S. GDP might have grown more than expected in the fourth quarter, but data from Sageworks, a financial information company, indicates there's still room to be concerned about the economy and hiring.

Privately held companies on average ended 2013 with annual sales growth of 5.4 percent, the slowest rate of sales growth since 2009, when sales contracted an average of 5.3 percent, according to Sageworks' Private Company Report. Private companies saw average sales growth of 8.9 percent in 2012 and 9.6 percent in 2011.

"The sales growth rate for private companies in the U.S. has significantly declined in the past year," said Sageworks Chairman Brian Hamilton. "Although companies are growing, the rate of growth is down, which is concerning."

Private companies with annual sales of less than $10 million saw a similar trend, with sales growth slowing to an average of about 4 percent in 2013 from nearly 8 percent in 2012.

Private companies drive nearly 50 percent of private nonfarm GDP and 65 percent of new job creation in the United States, so their financial performance is an essential gauge of the overall U.S. economy.

Overall, privately held businesses posted strong profit margins in 2013, but Hamilton noted the average annual margins might be the result of business owners being cautious to take on overhead in the form of new employees and assets. Privately held companies' net profit margin, on average, expanded to 8.5 percent in 2013 from 6.1 percent in 2012. Net profit margin has been adjusted to exclude taxes and include owner compensation in excess of their market-rate salaries. These adjustments are commonly made to private company financials in order to provide a more accurate picture of the companies' operational performance.

Through its cooperative data model, Sageworks collects financial statements for private companies from accounting firms, banks and credit unions, and aggregates the data at an approximate rate of 1,000 statements a day. The ratios in the Private Company Report are subject to change as companies continue to file their year-end financials, but Sageworks is confident the 2013 numbers are indicative of directional change.

Among four major sectors analyzed by Sageworks, manufacturing (NAICS 31, 32, 33) experienced the biggest slowdown in sales growth from 2012. Average sales growth was 3.2 percent, compared with double-digit growth in both 2012 and 2011. Net profit margin for manufacturers, on average, expanded, but less dramatically than in other sectors. Privately held manufacturers' average net profit margin for 2013 was 6.1 percent, compared with 5 percent in 2012.

Previous research by Sageworks indicated that some of the fastest-growing industries included support activities for mining, oilseed and grain farming, manufacturing of agricultural, construction and mining machinery and computer systems design and related services.
The government's GDP report noted that, despite the fourth-quarter bump, the U.S. economy's growth slowed in 2013 to 1.9 percent from 2.8 percent in 2012.

Sageworks, a financial information company, collects and analyzes data on the performance of privately held companies and provides accounting and audit solutions.