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Sales Growth Slows at Private Companies: What Does That Mean For Jobs?

NEW YORK ( TheStreet) -- The "precipitous decline" in the rate of sales growth at privately held companies over the past few months could mean fewer jobs next year, warns Brian Hamilton, co-founder and CEO of Sageworks.

The average annual sales growth for private companies has slowed to approximately 5.4% as of September from 9% on May 31. Sales increased on average 6.9% in 2010 and 10.4% in 2011, according to a presentation Hamilton gave to a group of reporters in New York on Thursday morning. Sageworks expects private company average sales growth this year to be 7.4%.

On the other hand, net profit margins are rising, according to the data. Net profit margins were on average 3.3% in 2009; 4.3% in 2010; and 5.3% in 2011. Sageworks expects the average net profit margin for private companies to be 7.9% this year.

"If these guys are not hiring when sales growth is 10% and net margins are healthy, what are they going to do [when sales growth is] at 5%?" Hamilton said during the presentation. While no one can predict a recession, "this trend is sort of similar to what we saw back in 2008."

Cash flow is the most primary concern for private companies, as opposed to public companies beholden to shareholders.

If private businesses continue to see sales growth slow, profit margins will inevitably slow -- but that will be a short-term effect, since business owners will likely cut costs to keep cash flow stable, Hamilton says. Companies are likely to make the adjustments to their profit margin by reducing their biggest expense: payroll.

"In 2013, what's going to happen in most private companies is that their sales might stay lower, they might go up, but they're going to invest to what? Their profit. They're going to manage to their profit or cash flow," Hamilton says. "We've got to know how they behave because it has very big implications to the job market."

The Bureau of Labor Statistics is expected to release the September unemployment rate Friday. Economists expect the rate to tick up to 8.2% from 8.1%.

There are 27 million private companies in the U.S. today versus 5,000 publicly listed companies. Eight million of those companies have employees. Private companies shouldn't necessarily be called small businesses, though, since more than 85% of the 18,500 privately held companies in the U.S. have more than 500 employees, according to Sageworks.
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