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.

The company analyzes 1,000 financial statements per day in approximately 1,200 industry codes.

Land subdivision was the only industry to see sales actually decline over the past dozen months, while nonmetallic mineral mining and quarrying had essentially flat growth, Sageworks says. Other slow-growing industries included business support services and places serving alcohol, the data say.

Industries that had growth rates above 25% year over year included: petroleum and petroleum products merchant wholesalers; industrial machinery manufacturing; and metal and mineral merchant wholesalers, the data found.

"There is real anxiety among companies about their businesses in the future," Hamilton says.

In this case blaming Washington might be warranted, he says.

"I'm a little worried that the environment being so poisonous in Washington right now, it really is, that they are throwing policies at these people -- 27 million people -- that at the last minute expect them to adapt and make decisions on a dime," Hamilton says. "Where's the anxiety coming from? It's not in the fundamental performance. It's outside of that. And then you look to D.C."

"Again if you're going to give a policy, these people are very adaptable, they really are ... they need to know what policies are coming down the pike so they can plan," Hamilton says.

Hamilton wouldn't comment on which presidential candidate would be better for private business.

"Most businesses probably lean conservative," Hamilton says. "I don't know whether Republican candidate Mitt Romney can pull off lower taxes but ... lowering costs would be a great thing."

-- Written by Laurie Kulikowski in New York.

To contact Laurie Kulikowski, send an email to: Laurie.Kulikowski@thestreet.com.

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