Hello,

In this quick post, I plan to give an overview into the world of small businesses, a subject that has interested me for quite some time now. It is an informal note on small businesses, different ways to approach the subject of small businesses and a couple of examples along the way.

Most of the case studies and examples I came across as a Business School student were of big businesses - Walmart, Google, Microsoft, Ford, BMW, how one would implement the latest SAP in that really big hospital, how did Starbucks become what it has become and so on. Unfortunately, I did not take any courses that might have dealt with the topic of small businesses like Entrepreneurship etc., So in my mind small businesses were always smaller versions of big businesses, and imagined similar management principles would be applicable to operate and grow small businesses.

I got introduced to small businesses as a distinct topic through this concept known as Entrepreneurship through Acquisition(ETA) [1]. As the name suggests, it is the idea of buying your way through entrepreneurship instead of starting up. Starting a company involves identifying an idea, a market gap, getting the idea vetted, building that product / service, probably involves several rounds of pivoting, freezing on the idea/product and then selling them to create a profitable customer base and so on. Whereas in ETA, the initial hassle of starting up is bypassed because the prospective small business already has products/services in its portfolio, the business that is bought typically has a stable customer base wih the market having exploitable growth potential - the focus now is on operating / managing and growing that business. ETA is on an upward trend in the USA, where MBA students and folks with decent industry experience are opting it. Typically, a small business with certain favorable characteristics is identified, necessary due diligence is conducted and bought & the buyer becomes the CEO / manager / operator of the company. In case idea interests you, I recommend you to read the book HBR Guide to - Buying A Small Business[3] by Harvard professors Rick Ruback and Royce Yudkoff to get a holistic understanding of ETA. The professors have a podcast Think Big Buy Small[3] as well. If you want to look at ETA from a more academic stand point, you must look at the works of Prof. A. J. Wasserstein[4] from the Yale School of Management.

Coming back to the the subject of small businesses, the first step in ETA involves searching for a suitable small business and conducting necessary due diligence, and ensuring the business is a good candidate. There are a number of characteristics one looks for in a small business during evaluation. From On the Nature of Economic Characteristics[5] by Prof. Wasserstein, the below are a few favorable characteristics.

High industry growth rate is present.
The industry competes in a sizable and fragmented market.
An exit path for a strategic buyer is present.

These factors are quite intuitive, in the sense that one can understand why a small business with these characteristics is a good target for acquisition.

While understanding these factors better [5], I got interested more in how any general small business functions, strategy needed to operate one, environment it operates in, its role in the economy, kind of policy that is necessary, risks involved and so on - essentially a 360-degree view into the world of small businesses. One of the first articles I came across is “A Small Business is not a Little Big Business” [15] which clarified some fundamental misconceptions I had and explained why small businesses are different from big ones and demand separate enquiry.

I think there are broadly two main ways of approaching the subject of small businesses: One from a purely management standpoint, where you look at their management practices, the strategy needed to run a small business, evaluation of the internal and external environment of a small business, the second is from a policy standpoint which should be made such that a favorable environment is created for running these small businesses. This is a spectrum and a typical research effort can cover one or more of these aspects of small business. For example, this [6] is an interesting paper on the coir industry of a particular district in Tamil Nadu, that covers its production and market dynamics. At the same time, this paper[7] talks about the challenges faced by SMEs in Japan.

This is a good time to look at a few formal definitions of small businesses. In India, a small business is refered to as an MSME (Micro, Small and Medium Enterprise) [22]. Below is how different classes of enterprises are defined:

Micro Enterprise: Investment in Plant and Machinery or Equipment: Not more than Rs. 2.5 crore and Annual Turnover not more than Rs. 10 crore
Small Enterprise: Investment in Plant and Machinery or Equipment: Not more than Rs. 25 crore and Annual Turnover not more than Rs. 100 crore
Medium Enterprise: Investment in Plant and Machinery or Equipment: Not more than Rs. 125 crore and Annual Turnover not more than Rs. 500 crore

In the USA, a small business is one with an employee count less than 500, although there are other limits on annual revenue and such parameters. The definition is not as straight-forward as it is in India. The US SBA (Small Business Administration) [23] offers a list of standards and also a size standards tool [28] that tells if a business is small or not.

Small businesses play an integral role in a nation’s economy. For example, according to the MSME Annual report of 2024-2025[9] and [10], the MSME sector is the second larger employer after Agriculture, it employs a total of 24 crore people, it contributes to ~36% of total manufacturing output, 45% of total exports from India and contributes to ~30% of India’s total GDP (FY 2022-23). Same is the position of small businesses in other nations as well - “The role of small and medium-sized enterprises in development: What can be learned from the German experience” [30] is a detailed working paper on German small and medium-sized enterprises. 99.6% of all the german firms are SMEs as of 2015 and has created close to 60% of all jobs in the nation and contributed to ~35% of all sales of all the firms in Germany. Similar role can be seen in USA and other nations too. UN publishes reports about small businesses and their role/position at the global level.

Small businesses operate in a very volatile and dynamic enrivonment. For example, 30% of the surveyed firms reported more than a 50% drop in revenue during the COVID-19 lockdowns [8], section 4 in this paper [11] gives a detailed view into what small businesses did during the lockdowns. In response, the Indian government rolled out relief policy to support MSMEs [11, Section 2]. Along with relief policy, there is a certain policy that is implemented to favor the growth of MSMEs [12], for example, there are a number of schemes to safeguard export-oriented firms in India [12, page 194], there are several industry-specific schemes as well to name a few. [13] is an interesting paper that talks about MSMEs being a strategic asset for the Indian economy, what all factors are to be taken into account when policy is being designed by different policy stakeholders (central/state ministries, financial institutions and so on). NITI Aayog recently published a detailed text [14] discussing in length about MSMEs in India and strategy to enhance their competitiveness, this is a more detailed text that discusses in detail most of the factors outlined in [13]. This is just policy pertaining to India, one will find policy related to every nation, and there are a lot of good reports on policy at the world level (several trade agreements, tariffs and taxes etc.,).

During the COVID times, the small businesses with diversified supply chains, firms that export goods, which have higher digital adoption have been able to manage during uncertain situations demonstrating the importance of sound business strategy [8, 11]. The good old article referenced earlier [15] helped me get a glimpse of the differences between small and big businesses. The article discusses the interesting concept of resource poverty that is a key distinguisher between large and small firms and necessity of special management tools and principles to work with the unique problems posed in small businesses. Another interesting article is “The Five Stages of Small Business Growth” [20] which presents a growth framework for small businesses which can be applied to a typical small business to resolve problems its facing. Harvard professors Prof. Royce and Prof. Yudkoff offer a specialized course on “Financial Management of Smaller Firms” [16] although it is not open for general public. A book that delves deeper into the management side of small businesses is “The Management of Small and Medium Enterprises” [18]. It discusses broadly all aspects of typical small businesses - strategic planning and mangement, human resource management, innovation management and functioning of entrepreneurial teams. This book focuses on the small businesses in the West (mostly EU) and contain a lot of interesting case studies. Two other good sources I found were (which are very vast in nature) are the Journal of Small Business Management [19], along with the “Routledge Library Editions: Small Business” [21] which has a host of books on several aspects of small businesses.

These are some places one can start exploring about small businesses from either policy or management standpoint. One other interesting publication I read that is at an intersection of management and policy is an NBER working paper “What Small Businesses do?” [17] which studies several small businesses and see the implications they have on policy. This paper has some seriously interesting findings, that often go against the traditional notion of entrepreneurship and small businesses. Attacting below the abstract for anyone who is interested.

In this paper, we show that most small business owners are very different from the entrepreneurs that economic models and policy makers often have in mind. Using new data that samples early stage entrepreneurs just prior to business start up, we show that few small businesses intend to bring a new idea to market Instead, most intend to provide an existing service to an existing market. Further, we find that most small businesses have little desire to grow big or to innovate in any observable way. We show that such behavior is consistent with the industry characteristics of the majority of small businesses, which are concentrated among skilled craftsmen, lawyers, real estate agents, doctors, small shopkeepers, and restaurateurs. Lastly, we show non pecuniary benefits (being one’s own boss, having flexibility of hours, etc.) play a first-order role in the business formation decision. We then discuss how our findings suggest that the importance of entrepreneurial talent, entrepreneurial luck, and financial frictions in explaining the firm size distribution may be overstated. We conclude by discussing the potential policy implications of our findings.

There are a couple of other ways to approach the subject of small businesses. Small businesses can be seen as a vehicle that can be used to uplift people and communities, provide them with a sustainable livelihood. In the Indian context, there are a large number of examples on how small businesses have helped in empowerment of rural people, women and tribal communities [24, 25]. Small businesses also play an important role in achieving a nation’s sustainability goals [26, 27]. One interesting paper related to this is “Sustainability Practices and Performance in European SMES: Insights from Multiple Case Studies” [31] which discuss the current status of sustainability management in select EU nations and look at different drivers and barriers, providing a managerial perspective and finally sharing recommendations for implementation of sustainability practices in small businesses.

These are a few approaches to study small businesses. Sound policy and management principles for small businesses can have massive impact on the people and economy of that nation - that makes it an interesting subject to delve into. A good starting point for me is the management of small businesses, sheerly owing to the familiarly of management concepts. But by now it is clear that management/strategy is inseparable from policy/environment in the case of small businesses, so a good side effect is we get an opportunity to understand the other side as well along the way. This article introduces small businesses, different aspects revolving around it and a couple of cursory readings on the same. In the coming days, I plan to write more on the topic of small businesses, with more depth and content, like an informal literature review of a particular aspect of small business, or a deep dive on an interesting problem etc.,

Until then, take care. Thank you for reading!

Cheers!
Adwaith

Small Businesses - An Introduction

References