Those of you that read this online publication on a regular basis know that we started a conversation several weeks ago on the topic of creating a buyer ready business. The first article looked at the emotions involved in deciding to sell and the second article examined some specific steps to create a buyer ready business.
So I was intrigued when a colleague forwarded an article delving into the challenges of growing an “entrepreneurial business.” This is a business that doesn’t just survive through the years but also thrives. This would also be, in keeping with our theme, a buyer ready business. So I thought I would share a few ideas from Ed Hess, professor of business administration and Batten Executive-in-Residence at University of Virginia’s Darden School of Business.
Professor Hess has just published a book, Growing an Entrepreneurial Business: Concepts & Cases. The research presented in the book is based on 54 high-growth entrepreneurial companies located in 23 different states, all of which were designated as successful growth companies by leading magazines or accounting firms. The 54 companies in Hess’ study were in a wide range of industries, had been in business on average 9.6 years, and had reached an average revenue level of $60 million, with the range being from $5 million to $350 million.
Managing Growth
Not surprisingly, Professor Hess found similarities in the challenges all of the studied companies faced as they grew – and this makes sense. If you own a middle-market business, chances are good that you face the same issues every other entrepreneur does. Challenges – such as finding qualified people, retaining them, obtaining financing, expanding your customer base, and doing all of this while making money – are common to middle-market businesses.
However, the differences he did find related to how the truly “successful” companies responded to their growth opportunities. This is how Professor Hess describes it: “The companies in my study understood that growth is change and change is risky. Entrepreneurs who understand this and the challenges that come with it are the ones with the best chances for successful growth.”
Essentially the “successful” companies in his study realized that growth for simply the sake of growth alone is not the ultimate goal. Growth with the goal of continual corporate improvement should be the objective. For example, 30% annual revenue growth over a five-year period is a great goal, but if it comes at the expense of good customer service and employee retention, ultimately, the rapid growth could damage the longer-term profitability of the company.
Professor Hess identifies this problem (one of the nine he outlines in his book) as being “overwhelmed by growth.” Or as he so succinctly puts it: “Growth requires more processes, controls, and people. Too much growth too quickly can create financial, quality, and reputational risks that if not properly managed can lead to the demise of the business. Keeping tabs on all of these factors can easily overwhelm business owners.”
I have seen this in several organizations that I have worked with over the years. Dramatic growth – mostly uncontrolled and under-managed – has often led to serious structural weaknesses later. Quite often this usually leads to further issues relating to both lost profits and ultimately lost growth opportunities.
The Evolution of a Leader
Another key challenge that Professor Hess identifies is one that we have discussed before in these articles: the transition of the founder/owner to professional manager and ultimately leader. This is a very hard transition for many entrepreneurs to make. Quite often the skills needed to found a business are quite different from the skills needed to lead a $20 million enterprise. No longer can the entrepreneur simply walk out on the shop floor and make instant changes. To effectively manage growth, a middle-management team must be developed and then encouraged (and allowed) to make significant decisions.
Successful organizations have leaders that have made this transition from simple manager to “coach-leader.” This is how Professor Hess describes it:
“Coaching requires that time be spent getting to know people, listening, caring, understanding their emotional needs, and helping them grow…Coaching takes patience and a degree of personal emotional intimacy that many entrepreneurs are not able to achieve. It requires a continuation of the mind shift from ‘me, the entrepreneur’ and ‘my way’ to ‘it is really all about them.’”
It seems to me that the bottom line is this: Being a successful middle-market business owner is quite a challenge. It requires controlling your growth so that your business is in operation for the long run. It requires that you evolve from a founder to a manager and then to a leader – a task that is very difficult to do. The good news is that it is possible—the companies studied in Professor Hess’ study are living proof.
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