The Glass Ceiling
In the life cycle of small businesses, there are predictable patterns that emerge. The $10MM glass ceiling is one of them. As an entrepreneur grows his business, the procedures and practices that gets him to a $10MM run rate are not the practices that will get him to $30MM. The ability to run lean, to take on multiple roles instead of hiring a new employee, keeping overhead to a bare minimum are all things that allowed the company to get where it is today. That is not, however, what will get them to the next level. The ability to identify the need for changes in operations is the difference between companies perpetually stuck at the $10MM size and those who leave that milestone in the rear-view mirror.
Private companies have the ability to think beyond the next quarter. A longer-term approach to business will allow the entrepreneur to build the company he wants to be in the next economic upswing during the current downturn. This is opposite of public-company short-term thinking. Those businesses attempt to grow during an upturn, simultaneously digesting new equipment, procedures, personnel, and an increase in orders. Predictably, this results in confusion, dropped orders, employee dissatisfaction, and a disjointed message to the customer.
By taking advantage of the downturn to prepare your business, you can attack the next upturn with the capacity, systems, procedures, and processes to take advantage of the economic opportunity.
There are several reasons why this is a good time to build infrastructure:
- Cash is coming out of working capital – As volumes decrease, businesses find that they have an abundance of cash. This reduction in working capital can be the capital you need to implement these business changes.
- Equipment is cheap – By buying capital equipment off-market, you have the opportunity to take advantage of cheaper prices and better delivery. You can probably find canceled orders from competitors at a bargain.
- High volume of qualified personnel – With layoffs abundant, qualified employees are more available than ever.
- You have the time – Even though it never feels like it, you have more time now than you will be when the orders are pouring in. Take advantage of this time and digest the changes before your capacity is stretched.
Build the company you want to be. The time, capital, and organizational energy spent in the trough of the economic cycle is directly correlated to the peak-to-peak increases in enterprise value of your company.
What to Change?
While this is not intended to be an all-encompassing list, here are a few areas to look for changes that will have the most drastic effect on your business.
- Implement an MRP or ERP computer system – While it is certainly possible for a small company to be managed from a yellow legal pad, it has limitations. Companies that implement a software-based platform that allows for the sharing of information are able to handle increased volumes. The ability to have the information and tools at your fingertips is a force multiplier and can allow your company to handle a drastically increased volume without a drastically increased management team. There is pain associated in implementing these systems and it is not something you want to do with a full plate of work. Implement and practice during the downturn to ensure you are fully prepared when the market returns and you are facing an increase in volume.
- Marketing – Marketing is typically the first expense to be cut during a downturn. This can work to your advantage. Reach out and touch those potential customers while your competitors are not. This will be hard to directly correlate to sales, especially in the near term. A well thought out (but not necessarily expensive) marketing plan sending the right message to the right people over time will have dramatic effects on your business. Increase your market share while your competition “cuts costs”. Here is an interesting article I found on this subject.
- Improve accounting – Take the time now to take your accounting to the next level. The best-case scenario for any kind of exit scenario is years of audited financials. While this can be painful and a stretch for some small businesses, increasing the level of accountability will pay dividends in the event of a sale, recapitalization, or other capital transaction later. If you are doing nothing, have a review conducted at the end of the year. If you are having reviews done, move to audits.
- Improve cost accounting – Spend some time examining your cost accounting methods and how helpful they are for your understanding how much your process truly cost you. While some information costs more to collect than the information has value, truly understanding the cost drivers of your business can give you a competitive advantage over your competitors. It is fascinating to see how many people do not grasp how much things cost them in their business. This can result in incorrect pricing and hemorrhaging of profits when it is not necessary and entirely avoidable.
- Improve sales techniques – No, I am not talking about buying your salesmen a new blue power suit. I am talking about stratifying your customer base to the point that you understand which customers are profitable and which ones are not. It is not enough for you, the owner, to know. Your sales force must be trained to identify the profit drivers and sell accordingly.
- Information Management Solutions – Jay Silverman, CEO of I-Safe Solutions, says now is the perfect time to take legacy data (paper) and convert it into a searchable, digital, usable information source to be a competitive advantage in your business. The time to implement these necessary changes is not when you are understaffed and working 80 hours a week trying to keep up with orders.
- Fix the bottlenecks – The last couple of good years should have exposed at least one bottleneck in your operations. Install the capacity to overcome those bottlenecks now. Fixing one bottleneck exposes the next one. Think through your company from a workflow perspective. You should be able to identify the next several bottlenecks and fix them proactively prior to them limiting the volume of your company.
CFA-Houston prides itself on our ability to help entrepreneurs maximize the value of their hard-earned asset. While a down market might not be the time for a total exit of your business, it might be the right time for a partial sale or recapitalization. Any type of growth and organizational change has associated risks. Getting an equity partner involved now might enable you to share the risk of change while participating in the profits they produce. It would also give you the opportunity to “get some chips off the table” to diversify your assets and participate in any future rise in the markets.
CFA-Houston has relationships with many equity partners who are looking for opportunities even in this uncertain market.