You’re the Boss Blog: What It Takes to Crack the Lower Middle Market

Creating Value

Are you getting the most out of your business?

When people think about small businesses, they often think about those in what is known as the lower middle market. These businesses typically do more than $5 million a year in sales, and they often have more than 25 employees. It’s good work if you can get it. For one thing, if your business is in this group, you are likely to get regular offers from people who are interested in buying your company.

But a lot of people don’t realize how tough it is to get there. Of the 27 million businesses in the United States, according to the Census Bureau, there are only about 300,000 with more than $5 million in sales. And there are only 150,000 businesses that manage to do more than $10 million in sales. It’s often when a business moves beyond $10 million in sales that a line is crossed: You will either have learned the skills of being a lower middle market business owner or you will fall back to being a traditional small business again.

Actually, there is another possibility. If you take the leap and add overhead to handle the extra sales you are expecting but those sales don’t appear, your business can easily fail. Overhead is easy to add and very difficult to cut.

The lower middle market is where business becomes more complex. To move upstream from a microbusiness requires that you become a manager. Taking the next step to being a middle market business requires that you learn to manage managers. Successful business owners in the lower middle market have learned to work through and with others. The better you can do this, the more successful your business will be.

Hiring is always important, but it becomes even more so in the lower middle market. The owner can no longer be involved in every decision and having the right people in the right places can often make the difference between success and failure.

This issue almost sunk my vending business. In 1995 when I ended my career in the vending and food-service business, we had built our company to four branch operations, 90 employees and about $6 million in sales. That put my business and me solidly in the Lower Middle Market.

But along the way, when we opened our second branch, I made a huge hiring error. The manager I selected was not very good at his job, and I wasn’t very good at managing him. Luckily I had a stable structure in our main branch, which allowed me to fire this manager and take over his responsibilities.

Eventually, I learned that hiring was more science than art. I found that if I followed a system, instead of using my gut, I could improve my hiring efficiency from 30 percent effectiveness to more than 80 percent. I also added systems for delivering service, managing cash and creating new business. This was all part of putting together a dashboard that allowed me to monitor what we were doing.

The real change for me was learning how to manage. I couldn’t do it by brute force. I had to learn to set standards and then to inspect to make sure our standards were being met. My dashboard was part of the solution. The other part was providing face-to-face feedback and learning to hold others accountable.

That required learning to trust and to allow our managers to make mistakes. When we were a small company, mistakes weren’t O.K. They happened, but no one would admit they happened, least of all me. As we grew I had to learn to let others make decisions and then learn from their mistakes. The key was keeping the mistakes small enough that they didn’t sink the business. The better I got at allowing myself and others to learn from their mistakes, the better my company became. And the more I removed myself from day-to-day operations, the more I was able to focus on strategic issues and initiatives.

A nice side effect of this is that cash flow often becomes more predictable. And that allows you to make plans, such as how to expand. As a business becomes more predictable, banks get more interested in you as a customer. This can create a source of financing for growth that may not have been available previously.

The best thing about being a private business owner is that you get to choose what type of business you want. My father has said for years that you are only limited by your ability and your ambition. I think he’s right.

Some owners believe that being a middle market business owner fits their needs. For others, staying a microbusiness is best. If you like the idea of being a traditional small business where growth is not your mantra, you can choose that route. Success isn’t guaranteed, and sometimes events get in the way, but part of successful business ownership is being able to take advantage of good luck and manage bad luck. It’s part of the deal you make when you decide to work for yourself.

Where do you want your business to go? What challenges have you faced along the way?

Josh Patrick is a founder and principal at Stage 2 Planning Partners, where he works with private business owners on creating personal and business value.

Article source: http://boss.blogs.nytimes.com/2012/11/29/what-it-takes-to-crack-the-lower-middle-market/?partner=rss&emc=rss