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Letter to Leaders & Swenson Insights

Forbes List Fail

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Recently, Forbes unveiled its newest list – “America’s Best Small Companies 2010”,which led me to wonder: What criteria did the magazine use to determine the “best small companies”?

Instead of taking a thoughtful, comprehensive approach to this process, Forbes chickened out, took the lazy way out, and insulted all small business owners and those of us who work with them. And, in the process, Forbes embarassed themselves. Their list should have been called “America’s Best Publicly Traded Small Companies Based on the Best Earnings Growth and ROE in 2010,” because that’s what the list really is. What it decidedly is not is a list of Americas Best Small Companies.

Someday, Forbes will realize there’s more to a successful – or “best” – company than a stock price. But that’s probably too much to hope for.

First, Forbes excluded millions of small businesses by requiring that candidates: “…for our list had to be publicly traded for at least a year, pull in annual revenue between $5 million and $1 billion, and boast a stock price no lower than $5 a share.” That eliminates a lot of companies – there are about 27.5 million businesses in the United States, but only about 6,500 are publicly traded. There are also thousands of successful small businesses that earn less than $5 million in revenue, but are profitable nonetheless. (In any event, the $5 million threshold was an illusion; the company on the list with the lowest revenue was Nevada Energy, with $29 million in sales).

But, we’ll cut Forbes a break here. They probably didn’t want to research millions of companies, and it’s a lot easier to measure publicly traded companies, since their financial reports are naturally made available to the public.

But that’s where the breaks stop. For Forbes imperically decided the only attributes that comprise a “Best Small Business” are:

  1. earnings growth;

  2. sales growth;

  3. return on equity in the past 12 months and over five years; and

  4. stock performance compared with that of its peers.

Say what?

Long-term, sustainable success in business – especially small business – is based not only on financial terms, but the quality of a company when it comes to such crucial areas such as:

  1. employee satisfaction and productivity;

  2. customer satisfaction and loyalty;

  3. how well a company benefits its community and strategic partners as well as its vendors.

Satisfied employees are always more productive; becoming an employer of choice takes a combination of corporate values, compensation, challenging work, a good environment and the opportunity for personal and professional growth. Businesses measure this all the time through Employee Satisfaction Surveys, or 3600 Surveys.

Customer satisfaction and loyalty – also easy to measure and benchmark – were not included as criteria by Forbes. Why? Because this list was clearly intended not to be the “Best Small Companies in America” – but actually a tip sheet for short-term investors and traders.

I’m not suggesting that financial measurments be eliminated when determining a best small company – it should just not be the only measurement.

Values play a significant role in successful business. How an owner’s values permeate throughout the workforce is essential to long-term success. Having and implementing long-term values such as quality of product and service; commitment to clients and customers; appreciation and understanding of the workforce creates a culture where the “best” truly comes out.

It’s ironic, then, that Forbes on one hand says, “we dropped companies that are thinly traded and those with fuzzy accounting or major legal troubles,” and on the other hand names Medifast as the #1 Best Small Business in America. Medifast, as you might know, is in the middle of a major lawsuit in which Fraud Discovery Institute accused the company of “ … pyramid-style selling – is unsustainable and will lead to a revenue trajectory similar to other multi-level marketing companies: dizzying initial expansion followed by lackluster revenue or worse…..”

Whether these accusations are true or not – they are illuminative. If Medifast is indeed one of “America’s Best Small Companies,” won’t they still be there in 2011 when the lawsuit is behind them? Why rush?

If you’re a day trader looking to make a quick buck – the Forbes list might be just right for you. If you’re looking companies to emulate or model as a Best Business – Forbes is out of answers, and this list is one epic fail.

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