I love my mechanic, Tomas. He was the former head mechanic at a major dealership here in South Florida. A few years ago, Tomas ventured out on his own. Specializing in German performance cars, Tomas employs his wife, son and an additional mechanic. The shop is small and customers come from all over South Florida due the family feel and excellent, reasonably priced work.
The other day, I asked Tomas why he did not expand into the bay next door and grow the business. His response, “Hell no, who needs the headaches!”
Sounds like Tomas has it right. But, there is a major trade off when it comes to a “lifestyle” business. In return for long hours, the owner makes a good living. There is food on the table; nice cars; and the kids attend good schools. There is nothing wrong with a lifestyle business. There are millions of lifestyle businesses. Just look your own neighborhood–the barber, the local cleaners, the corner bakery. However, for the most part, one will never retire rich. Tomas consciously made this decision.
I don’t know what Tomas’ business grosses. But my guess is just shy of $1 million annually. In my opinion and experience, it’s not hard to grow a business from zero to $1 million. Yes, you read that correctly. With the assumption that you have a product/service that somebody wants, growing a business to $1 million can be easy because:
- With a limited set of customers, every customer can be made to feel special
- Small number of employees, most of whom are known before being hired, makes it easier to deliver better products and services
- Any process or procedure can be adjusted, corrected or implemented immediately
- Employees tend to work harder and smarter because there is a real connection with the owner and the business
- The owner has the pulse of every aspect of the business
- Cash flow issues, when they surface, are usually covered with personal funds or a personally guaranteed credit line.
But what if you want more? What if you want to grow your business to $10 million or more? To do so, you need SCALE:
- Sales – When you are a small business, customers came to you. With great services and products and possibly a pricing advantage due to your small size, “word of mouth” and referrals drive sales. This all changes as you try to grow the business. Many times the owner is forced into a business role that he/she is not comfortable with. As growth continues, the business requires sales people to fuel revenues.
- Cash – With growth comes the potential for major cash flow issues. For example, payroll is due and there is not enough in the bank to cover. Most small business fail due to lack of access to cash. Securing credit lines or other sources of cash for working capital is critical to growth.
- Automation – To grow, delivering customized services and products becomes a challenge and introduces more cost into the business. Wherever possible, manual tasks must be automated. Likely for the first time, the business faces a major investment in information technology. Documented processes and procedures are critical.
- Long-Term – There are many moving parts to a growing business. Many times investments are required today in order to grow revenues, deliver better products/service or reduce costs in the future. Often relegated to large corporations, annual planning, quarterly reviews and monthly financial reporting must become part of the business.
- Employees – As you grow, you need to hire more and more employees. Now, more complex human resources challenges come into play–attracting quality candidates, competitive wages, benefits, background checks, terminations–becomes a major business priority. This complexity takes greater hold as many state and federal employee and safety laws begin to apply. And one bad termination can lead to a lawsuit , which can be the ruin of the growing business.
I’ve had the fortune of starting and selling two businesses, one of which employed over 125 employees. Growth is a decision. From initiation, we made growth a priority for the businesses. This meant that everything we did was with SCALE in mind, from the types of services we provided to the kind of customers we wanted. Although very hard at times, sticking to SCALE allowed us to grow the businesses and ultimately sell them at a very nice multiple.