Starting Vs. Growing Your Business
Most company founders are good at the first stages of entrepreneurship. But in the phases that follow, they may only be average. Just because you have a knack for starting companies, doesn’t necessarily mean that those skills translate well into growing one.
There are celebrated cases of founders who have successfully started and grown a business – Elon Musk and Bill Gates come to mind. There are, however, many more examples of entrepreneurs who perform well initially and then hold back their company as it ages. But, as a business owner, you can avoid this.
How One Founder Unlocked the True Value of His Company
Damian James grew up in Melbourne and learned a lot about the aging population in Australia. Realizing that healthcare could be a lucrative field, he discovered a sector ripe for disruption, podiatry. This is a branch of medicine devoted to the diagnosis, medical and surgical treatment of foot and ankle disorders.
At the time, most podiatrists in Melbourne worked from a retail location where the doctor owned and operated a private practice. The podiatrist would rent space, hire some staff, and charge patients per visit. At night, some enterprising doctors would also visit old age homes to offer care. Reasoning that many old people nodded off shortly after dinner, James saw an opportunity for a podiatrist to visit old age homes during the day when it was more convenient for patients.
The Million Dollar Idea
James, who had earned a bachelor’s degree in Podiatry in 1996, started Aged Foot Care. He approached old age homes with a compelling offer of removing the traditional overhead of an office.
Aged Foot Care went through a variety of growing pains over the years, including an expensive rebranding to the name Dimple. By 2015, Dimple was generating roughly $200,000 of profit on $2.5M in revenue.
Time to Grow
Despite his success, James was frustrated. The company’s growth had stalled. His management team seemed perpetually incapable of hitting its targets.
Quarter after quarter, he would set goals with his team, but they would fall short. James decided it was time to bring in outside help, so he hired a Chief Operating Officer.
To recruit the new COO, James knew he would need to give up some equity, so he commissioned a valuation for Dimple which came in at $2.5 million. He offered a salary, plus 5% of the company. James also offered another 3% of the business (up to a maximum of 20%) for every $1 million the COO would grow Dimple’s revenue past $5 million.
The new role was a success. James quickly promoted him to Chief Executive Officer and stepped back from the day-to-day operations. He decided to let the company thrive under the new CEO’s leadership.
Down to just one day a week, James limited his involvement to providing a vision and protecting the company’s core values. The CEO, on the other hand, ran the day-to-day business – pursuing James’ core strategy of contracting with aged care facilities.
The company hit $11 million in revenue by 2017.
The Big Bonus
Zenitas had a similar strategy of bringing healthcare to patients in homes or care centers rather than having them languish in hospital beds. The company was keen to add podiatry to its stable of services. The decision makers realized that acquiring Dimple would allow it to become an overnight market leader.
In July 2017, Zenitas announced they had acquired Dimple for $13.4 million. Under different leadership, the company had grown in value over 500% in less than three years.
Starting and growing a company require different skills which are rarely found in the same individual. This begs the question, ‘is it time to find someone else to run your business?’
Small businesses often operate as if their sole purpose is to fund the owner’s lifestyle, but the most valuable companies are run with financial rigor. You may be years from wanting to sell, but starting to formalize your operations now will help you predict the future of your business. Then, when it does come time to sell, you’ll fetch more for what you’ve built because acquirers pay the most for companies when they are less risky. There’s nothing that gives a buyer more confidence than clean books and proper record keeping.
Jay Steinfeld is a great example of how to run a business like a public company. Steinfeld studied Accounting at the University of Texas and joined KPMG after college. His wife owned a small retail store selling blinds and window treatments. The store was successful, but by 1994, Steinfeld had noticed a little Seattle-based outfit that was trying to hawk books online. This company with the peculiar name “Amazon.com” started to succeed in selling books online and Steinfeld wondered if he could get consumers to buy blinds online.
Soon after, Blinds.com was born.
Unlike many of the first-generation online companies that were run with little financial controls, Steinfeld grew Blinds.comlike an accountant. He was determined to run his business with the same rigor as a publicly listed company. He built an experienced management team and took the unusual step of assembling an outside board of directors even though Blinds.com was private and Steinfeld owned all of the stock.
The board met quarterly and each of Steinfeld’s senior managers were asked to prepare and deliver formal presentations to his board. Steinfeld hired a big four firm to complete a full audit of his financials each year even though all he needed to satisfy Uncle Sam was a simple tax return.
By 2014, Blinds.comhad grown to 175 employees and, at more than $100 million in revenue, was the largest online retailer of blinds in America. Even though Home Depot had close to $90 billionin sales at the time, Blinds.com was outperforming them in its tiny niche, which – coupled with their fastidious bookkeeping — made Blinds.com absolutely irresistible to Home Depot. On January 23, 2014, Home Depot announced its acquisition of Blinds.com.
Running your business like it’s public will make it more predictable as you grow and ultimately a whole lot more attractive when it comes time to sell.
If you were to draw a picture that visually represents your role in your business, what would it look like? Are you at the top of an organizational chart, or stuck in the middle of your business like a hub in a bicycle wheel?
The Hub & Spoke model is a drive that shows how dependent your business is on you for survival. The Hub & Spoke model can only as strong as the hub. The moment the hub is overwhelmed, the entire system fails. Acquirers generally avoid these types of managed businesses because they understand the dangers of buying a company too dependent on the owner.
Here’s a list of the 5 top warning signs that show your business could be too dependent on you.
1. You are the only signing authority
Most business owners give themselves final authority… all the time. But what happens if you’re away for a couple of days and an important supplier needs to be paid? Consider giving an employee signing authority for an amount you’re comfortable with, and then change the mailing address on your bank statements so they are mailed to your home (not the office). That way, you can review everything coming out of your account and make sure the privilege isn’t being abused.
2. Your revenue is flat when compared to last year’s
Flat revenue from one year to the next can be a sign you are a hub in a hub-and-spoke model. Like forcing water through a hose, you have only so much capacity. No matter how efficient you are, every business dependent on its owner reaches capacity at some point. Consider narrowing your product and service line by eliminating technically complex offers that require your personal involvement, and instead focus on selling fewer things to more people.
3. Your vacations… don’t feel like vacations
If you spend your vacations dispatching orders from your mobile, it’s time to cut the tether. Start by taking one day off and seeing how your company does without you. Build systems for failure points. Work up to a point where you can take a few weeks off without affecting your business.
4. You know all of your customers by first name
It’s good to have the pulse of your market, but knowing every single customer by first name can be a sign that you’re relying too heavily on your personal relationships being the glue that holds your business together. Consider replacing yourself as a rain maker by hiring a sales team, and as inefficient as it seems, have a trusted employee shadow you when you meet customers so over time your customers get used to dealing with someone else.
5. You get cc’d on more than five e-mails a day
Employees, customers and suppliers constantly cc’ing you on e-mails can be a sign that they are looking for your tacit approval or that you have not made clear when you want to be involved in their work. Start by asking your employees to stop using the cc line in an e-mail; ask them to add you to the “to” line if you really must be made aware of something – and only if they need a specific action from you.