Positive Trends Emerging at Privately Held Companies

By Mary Ellen Biery, Sageworks Inc.FOXBusiness

Business trends at privately held companies, those millions of businesses that drive job creation and the U.S. GDP, confirm that things are turning around from the worst economic climate in generations.

Sageworks Inc. used its proprietary database of financial information on thousands of privately held companies to examine 2011 trends within key metrics of a company’s health: sales, net profit margin and debt-to-EBITDA.

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For the full year in 2011, revenue for all privately held U.S. companies analyzed increased about 8%, on average, accelerating from the nearly 5% increase in 2010. Sageworks’ data shows manufacturing and wholesale merchants led the growth, with those sectors generating about 14% and 13% growth, respectively.

Such growth in an essentially flat economy speaks to the role manufacturing has played as demand for automobiles, trucks, machinery and equipment have improved. But even construction has shown signs of life, with both profitability and sales improving in 2011.

“Certain sectors such as real estate are still recuperating, but the economy is doing well,” said Sageworks Inc. chief executive Brian Hamilton. “This does not mean for certain that the economy will continue to grow, but at least the recovery is evident.”

The health care and social assistance sector continued its multi-year string of steady sales growth last year; it has been more immune to the recession’s effects than other sectors. And while profitability in the health care sector took a hit during the recession, it has finally returned to pre-recession levels.

In fact, nearly all of the private sectors examined by Sageworks returned in 2011 to pre-recession levels or better in terms of profitability. Across all industries, adjusted net profit margin has increased to an average of 6.28% from 4.87% in 2010, surpassing the 5.6% margin among all companies in 2006. Sageworks’ data indicates that companies continue to operate with decreased overhead in the face of higher sales costs.

Sageworks adjusts net profit margin to exclude taxes and 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.

Privately held companies’ ability to service their debt also improved in 2011. Looking at ratios of debt to earnings before interest, taxes, depreciation and amortization, or EBITDA, private companies are in the best shape they’ve been in since 2007. Debt to EBITDA is commonly used to assess the probability businesses will default on current debt, with higher numbers indicating negative trends.

The professional, scientific and technical services sector, transportation and warehousing, information and health care each have debt-to-EBITDA ratios that are below the average of 4.84 for companies across all sectors. Despite some improvements in sales and profitability trends for the construction industry, its debt-to-EBITDA ratio continued to climb in 2011 and was 6.75. Only the retail sector and wholesalers had higher ratios, even though theirs were at multi-year low levels.

How important are private companies? While Wall Street focuses on the performance of public companies, it’s important to remember that not all employers in the U.S. contribute to new job creation equally. Out of the 27 million businesses in America, only about 6,200 are publicly traded on listed exchanges. Most others are privately held, and many of them are small businesses.

No government agency tracks private company performance by itself. But small businesses, which the government considers to be any company with fewer than 500 employees, drive approximately half of GDP and 65% of new job creation, according to the Small Business Administration. Figures for all privately held businesses, including medium and large private companies, would be even higher, assuming most small businesses (by the government’s definition) aren’t publicly traded.

Sageworks’ data show that private companies in 2011 grew sales and profitability, and are in better financial shape to avoid defaulting on current debt. That could be good news for hiring. Historically, when revenues rise for private companies, these businesses tend to hire people, and recent unemployment rates have indeed decreased.