Small business owner liquid wealth at firm startup and exit

The relationship between small business ownership and wealth looms large in the imagination of policymakers and entrepreneurs alike. Indeed, people who own businesses are wealthier than those who do not. In 2019, the median net worth of self-employed families was $380,000—over four times larger than the $90,000 in net worth held by the typical working family (Headd 2021). Perhaps for this reason, thousands of people every year decide to start a business, though a similar number of businesses exit each year as well. A key question for policymakers is the extent to which business ownership itself is responsible for this difference in wealth.

To date, most studies have found that small business ownership is concentrated among higher-wealth people prior to starting a business (Evans and Jovanovic 1989; Fairlie and Krashinsky 2012) although some research has found that, after removing the wealthiest entrepreneurs, this might not be true (Hurst and Lusardi 2004). Using de-identified Chase personal and small business deposit account data we explored cash balances for small business owners prior to starting a small business, over the first two years of operation, and around the time of a firm’s exit. This allowed us to understand the liquid wealth of small business owners when making important financial decisions at critical moments.

In this brief we studied the liquid wealth of small business owners as they start new firms, and as they close firms. To do this, we leveraged a unique data set that offers a granular, longitudinal, and high-frequency lens on financial outcomes, both for people and the businesses they own. Importantly, it provides a perspective on the financial health of small business owners before they open their businesses. Our lens on liquid wealth is the average daily balance across all savings and checking accounts held by a person or small business in our study period. It does not include assets contributing to total wealth like brokerage accounts or physical property. While our focus on liquid wealth structurally understates the total wealth available to people, it provides an unprecedented lens on the evolution of small business owner finances through the entrepreneurial life cycle. Moreover, if people with more wealth generally hold more cash than those with less wealth, then liquid wealth can still provide a view of relative wealth.

Our findings are threefold. First, we find that the typical small business owner had higher liquid wealth than wage earners prior to starting a small business. Second, among small business owners, differences in liquid wealth may impact a small business’s ability to grow and, therefore, generate wealth for the owner. Third, small business owners who close their firms tend to have lower liquid wealth than owners whose businesses stay open.

Data

We selected our samples from 3.7 million de-identified people who actively used Chase banking products between January 1, 2014 and December 31, 2019, consisting of 320,000 people identified as small business owners and the remaining people who we identified as wage earners. Our study period ends prior to 2020 because of the unprecedented nature of the COVID-19 pandemic and the federal government’s response. Federal relief programs contributed to elevated small business (Wheat and Mac 2021) and personal (Greig, Deadman, and Sonthalia 2021) balances. Limiting our study period to only cover outcomes through 2019 allowed us to understand typical liquid wealth without COVID-19 related support.

We used a three-step process to identify wage earners and small business owners. We first identified the universe of people who we believe used Chase as their primary bank, then identified the universe of small businesses that we believe actively used Chase as their primary bank, and then identified small business owners and wage earners from our universe of people. We identified small business owners in this sample as people who had sufficient activity in Chase personal accounts and were also listed as owners on a business account. We identified wage earners as people who were not small business owners and met a minimum threshold of direct deposit transactions in every year of our sample. Although many wage earners do not receive direct deposit paychecks, this restriction allowed us to better identify wage earners who were less likely to be small business owners of firms banked elsewhere.

Our direct deposit requirement likely made our sample of wage earners different from the general population. Specifically, these people were regularly employed and had a stable relationship with a bank. This could mean that our sample had higher levels of liquid wealth than the general population, and that we might overstate the liquid wealth of people who do not own small businesses. If true, our findings understate the true difference in liquid wealth between wage earners and small business owners.

We identify race and gender through modeled data provided by a third-party vendor.¹