The Impact of Terror

When will small-biz confidence come back?

For Vivek Wadhwa, it was supposed to be the best week of the year. Following a four-month drought, in which he failed to complete a single deal, the founder of Relativity Technologies, a Cary (N.C.) software developer, was on the verge of closing five major sales--enough, he hoped, to send his company into the black, and a sign that the toughest period in Relativity's four-year history was drawing to a close.

Then, on the morning of Tuesday, Sept. 11, terrorists attacked New York and Washington. As Wadhwa, 44, watched the grim events unfold on television, his 85-person company received a blow of its own: Each of the five pending deals was now on hold because the clients, most of them large corporations, were postponing all spending decisions. "Who knows how long it's going to be now?" says Wadhwa, an Indian immigrant with two decades in the U.S. "I am nervous as hell."

He's not the only one. The Sept. 11 attack, which sent the stock market plunging, has darkened the outlook of many of the nation's entrepreneurs as well. The U.S. economy was teetering on the edge even before the terrorists struck. Now, many fear a recession could be inevitable. Says Brian Headd, an economist with the U.S. Small Business Administration's Office of Advocacy: "All bets are off."

FROM OPTIMISM TO FEAR. That could mean a striking reversal of fortune for entrepreneurs. In August, one-third of small-business owners reported sales increases, up from just 26% in June, according to the National Federation of Independent Business. Reports of declines fell to 26%, from 37%, over the same period. That helped send the NFIB's index of small-business optimism to a 12-month high in August--a sign that many entrepreneurs felt the economy had hit bottom.

But since the attack, entrepreneurs like Mazin Ramadan, CEO of 4thpass Inc., a telecommunications software company in Seattle with 50 employees, are finding it hard to feel confident. "I don't want to think about making new sales until things go back to normal," the 33-year-old entrepreneur says. "But I don't even know what normal is anymore." Ramadan's most pressing concern right now is travel. At any given time, he has up to nine employees working in three different countries. With the airline industry in turmoil, Ramadan fears a huge spike in travel costs will prove overwhelming. As a result, he plans to replace much of his U.S. and international travel with videoconferencing.

Decisions like that already are sending shock waves through other small businesses. Corey Fritz, CEO of SouthCoast Rent-A-Car, a 12-person rental-car agency in Newport Beach, Calif., expected his 2001 sales to be 15% more than the $1.2 million he brought in last year. But since Sept. 11, daily revenues have plunged more than 25%--and he sees few signs that they'll pick up anytime soon. So Fritz plans to lay off two part-time workers and cut the hours of his full-timers. Plus, he's frantically revising his business plan, hoping that by targeting local companies, he can reduce his reliance on business travelers. "Businesses don't want to fly their employees anywhere right now," Fritz says.

The question is whether individual cutbacks like Ramadan's and Fritz's will result in a short-term slowdown or a full-scale, small-business recession. "It's definitely going to push you into recessionary conditions," says Jack Kyser, chief economist of the Los Angeles Economic Development Corp., who says most small outfits lack the resources to weather a sustained drop in corporate and consumer spending. Roger Harris, president of Padgett Business Services, an Athens (Ga.) accounting firm with some 15,000 small-business customers, expects clients to carefully scrutinize every expense. "Every time they place an order, they're thinking about whether they really need it," he says.

SHOWING SPIRIT. Others aren't so discouraged. The attack "is not so much a big economic event as it is a big political event," says William C. Dunkelberg, chief economist of the NFIB. His research suggests that small-business owners tend to remain chronically optimistic following political and economic upheavals (chart). Dunkelberg's prediction for the current crisis: "We'll be in shock for awhile. The stock market will flounder. But it won't last long."

Indeed, it's not hard to find an optimistic small-business owner. John Sheaffer, president of Sysix Technologies LLC, a 50-person hardware and infrastructure provider in Westmont, Ill., is having his best year ever in 2001, with sales of about $35 million. He has no plans to slow down now. His salespeople were working as hard as ever--and clients, he says, are responding. "There is a wave of patriotism," says Sheaffer, 36. "Everyone wants to show their spirit by getting back to doing what they do every day." But flag-waving alone won't pay the bills. Customers have to resume waving money around again--and right now, business-as-usual seems too much to expect.

By Larry Kanter

with Naween A. Mangi in New York

— With assistance by Naween A Mangi

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