The Big Decision: Stay Small or Try to Grow
A traditional small business usually has five to 25 employees and does $1 million to $5 million in sales. I spent four years as an owner of a traditional small business, a vending company, and for the first three years I thought it was a great place to be. We had profits, it was an easy business to control, our customers loved us and I was able to go to work at 7 a.m. instead of 4 a.m., which is what I had been doing when the business was smaller. What's not to like?
The problem, at least for me, was that after three years I started getting bored. This is a problem many owners of traditional small businesses face. You get up, do about the same thing every day, and are involved in every decision. The boredom led me down the road of wanting to build a bigger and more complex business.
I imagined that if I grew my vending business, life would become more exciting. Little did I know how exciting it would become.
Tough Transition: From Small to Middle-Market Business
All owners of traditional small businesses face the same choice. Not all of them fully appreciate how hard the transition can be. The number of businesses that make it from a traditional small business to a middle-market business is relatively small. According to the Census Bureau traditional small businesses number 1.7 million. There are only 300,000 businesses in the lower middle market. That's some indication of just how difficult the leap can be.
Jim McHugh writes about where middle-market businesses get stuck at 9 Stucks. I find the things he writes about apply to traditional small businesses not only in getting stuck but also in figuring out what skills are necessary to expand.
If you want to expand a small business, you have to have access to capital. That means you have to develop systems so that you can start to scale your operations. It means you need a system for managing your sales process. It means you have to be able to judge when to add overhead and when that would be a mistake. These issues and more are what keep traditional small businesses from making the leap. Making the move to a middle-market business will make your life more complicated and your business more complex.
In the early days of our family business, my father decided not to try to grow out of his one market. He didn't want to learn and pursue the activities that would have required. Having a few cafeterias and a few routes to manage was much easier than learning how to run a vending company with operations in more than one city. It wasn't so much that he was stuck. It was more that when he took a look at what it would take, he decided to pass.
If you want to own or enlarge a small business, you also have to understand how hard it is to compete on price. When owners choose this route, they often find that their larger competitors have deeper pockets. The larger companies know that this is a fight they will win in the end. The good news is that the larger companies usually can't compete with the personal service that a traditional small business can provide. Service is the special sauce that allows smaller businesses to exist.
Businesses in this group must become efficient at serving a particular type of customer. Just as with a microbusiness, you're likely to have more customers than you can ever serve. Owners often learn that business becomes much easier if they focus on a specific niche — rather than trying to do everything for everyone who walks in the door. Picking a niche is also likely to be more profitable — and to create the extra cash that makes further expansion a possibility.
(Read more: The Joys (and Dangers) of Owning a Microbusiness)
When I was in the traditional small-business stage, my company was producing good profits and creating enough extra cash to allow me the choice of remaining at this level or trying to make the move to becoming a lower-middle-market business. I had enough money to pay myself a nice salary, to put a significant amount of money away for retirement and to provide capital to replace equipment as needed. I especially liked the part where I got a regular paycheck.
I enjoyed being the owner of a traditional small business for about three years. Then the urge to grow and expand set in. We ended up buying a second business in a different town. That pushed me on the path to becoming a lower-middle-market business. Some days, I wished I had stayed where I was. In the end, the challenge and excitement of being a bigger business was worth the extra effort and learning.
What about you? Have you decided to take the plunge and see if you can make it to the next stage? I'm eager to hear your stories.
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.