Creating Value

Are you getting the most out of your business?

One of the biggest decisions business owners face is whether to try to expand their businesses. This may seem like a silly question: Who wouldn’t want a business to grow? But owners who choose growth can get stuck. For some, the issue is how to handle delegation. For others, it’s about raising enough capital. And for still others, it’s about learning the technical skills required to manage a growing business.

Years ago, my two-person company was transformed by an acquisition that forced me to make several changes. I immediately had to learn skills that many learn over a period of years. The acquisition caused our sales to grow to $1.5 million from $75,000 and employment to grow to more than 20 full-time workers from one part-time employee. There were more changes four years later, when we bought a company that was located out of town. Now, I not only had to manage more than 30 employees, I had to figure out how to manage a company in a different city.

During the last 30 years, I’ve come to understand that there are three types of business. Each one places burdens on its owners that are different and distinct. But the point is that a business owner has a choice: You don’t have to get swept up in growth. Here are the options:

Microbusinesses are where all start-ups begin. The vast majority of the 27 million businesses in the United States are microbusinesses. Some are start-ups, some have been in business for years and some would like to be bigger, but the owners can’t figure out how to make the leap.

Microbusinesses are often one-person shows. If the owner becomes disabled or dies, the business falls apart. The biggest challenge with a microbusiness is keeping a steady stream of income. In my case, when I had a microbusiness, I would fill vending machines, make sandwiches for our machines, order stock for our warehouse, fix vending machines when they were broken, do our bookkeeping and count the money — in other words, I was the chief cook and bottle washer.

For me, being in a microbusiness was similar to buying myself a job. And in my case, the job was mostly about filling vending machines and making sure they worked. There was no time to think strategically or act strategically. I even found it difficult to find time to make sales calls. For many microbusinesses, there just isn’t time or money to make the jump. My break came when one of our competitors went out of business and we were able to buy its assets. This catapulted me to the next level.

I think of the next largest group of businesses as traditional small businesses. These businesses usually have five to 25 employees. They are more complex in that the owners don’t do all of the direct work themselves. They have moved into a role supporting or supervising others. As with microbusinesses, many owners decide this is a good place to be and don’t want to make their business any larger.

Those owners who do want their companies to move to the next stage have to develop the ability to create capital for growth. They also have to learn tools and techniques for running a larger company. Sometimes these owners get stuck because their businesses don’t make enough money or because they haven’t learned the right skills.

When my business was in this stage, I didn’t delegate well. I often felt like a firefighter. I had people who could help but no one who could manage. If there was a problem, it always came to my attention. Actually, I wanted it that way. I was convinced that no one could do anything in the business as well as I could. I wasn’t ready or willing to let go and have others help run my company.

This was my personal roadblock. I didn’t know how to manage; I just knew how to provide good service through brute force.

Those who do move on can become a lower middle market business, which is a business that can be sold. That means the business has to be able to run for long stretches without the efforts of the owner. Businesses that create enterprise value typically have more than 25 employees and produce more than $5 million in sales per year. The United States Census Bureau says there are about 300,000 businesses in this category.

Owners of successful companies that produce enterprise value know how to act and think strategically. They have created companies that function with tactical excellence; they are not just trying to get through the day. The truly successful businesses in this class have also achieved strategic excellence. It’s when tactical excellence is joined by strategic excellence that real value is created for the owner.

Moving into the lower middle market was a very difficult transition for me. I had to learn to trust my employees, allow others to make mistakes, put together dashboards to monitor what was happening in the company and find a way to take myself out of day-to-day operations. Oh, and I almost forgot — I also had to find a way to finance the growth and additional resources that we needed.

Over the next few weeks I’ll delve more deeply into the positives and challenges that come with each of these types of business. Please feel free to share your experiences owning a business in one of these stages — or moving from one to another.

Josh Patrick is a founder and principal at Stage 2 Planning Partners, where he works with private business owners on wealth management issues.

Article source: http://boss.blogs.nytimes.com/2012/11/01/some-businesses-choose-not-to-grow/?partner=rss&emc=rss