Why We Target Companies of a Specific Size for Value Growth

We call them Goldilocks companies. They are producing between $1 million and $20 million in revenue

If you can’t afford to have people running your business, you don’t really have a business. 

You have a job.

This is a fundamental concept I want a business owner to understand once they make a decision to grow.

Growth is a decision

The decision to grow is one that should be made with trepidation. As Verne Harnish put it in his business classic, Mastering the Rockefeller Habits, “Most entrepreneurs don’t like working with anyone, including their own employees! This is the major reason why 96% of all firms have fewer than ten employees, and a vast majority have fewer than three.”

Does the owner have the capacity for growth?

So if the business owner decides that she wants to grow, she must also have the capacity to grow. Michael Gerber coined the phrase “working ‘on’ your business and not just ‘in’ your business” in his small business standard, The E Myth. Working on your business is going to take some time away from working in it. There’s a critical mass needed to be able to do that.

According to the US Census Bureau, there are roughly 29.5 million businesses in the United States. 23.8 million of those have no paid employees and their average revenue is less than $50,000 per year. The market impact of these is limited.

Of the 5.72 million employer-based businesses left, 76% of those have less than $1 million in revenue. In early 2018, Value Builder compiled an analysis of 29,746 business owners taken over the preceding 5 years. 49.1% of the respondents with less than $1 million in revenue said they would “suffer a lot” if the owner were unable to work for three months.

It’s not fair to say that non-employer firms and employer firms of less than $1 million in revenue cannot grow. Everybody starts somewhere. The point is that these owners often don’t have the time, inclination, or capacity to work ‘on’ their businesses without some degree of scale.

My experience with business owners is that without some scale, they just won’t be able to make the commitment. 

I focus on working with business owners with companies that have between $1 million and $20 million in revenue. We’ll call them the Goldilocks companies.

These are companies that are poised for rapid growth. They have owners who can spend time and resources on strategic projects. They are small enough to make decisions and big enough to take some time away from the day to day operations to work on their business.

Why not help the smaller businesses get to over $1 million?

There is an element of practicality here. After all, I’m running a business too. Can a business earn less than $1 million in revenue afford my help? We passionate business owners would love to help everyone but we need to practice what we preach. That means being responsible and realistic about who we exist to serve.

I don’t believe in selling time for services but there is a relationship between time and value that cannot be ignored. As a rule of thumb, businesses may budget up to 0.5% of their annual revenue for coaching or business strategy. It’s just not enough to do this work in a meaningful way with revenue of less than $1 million. 

Smaller revenue business owners are also far more likely to be working in their businesses than on them. Even if the owners have the financial resources, they are much too involved in the day to day operations of their companies to devote the time to strategic growth projects.

Money and time are the obstacles to delivering value to these owners. I only want to take on an engagement if I can be sure to deliver more use value than I am taking in monetary value.

Why limit the size to $20 million then?

It’s not a hard limit but one born also of business practicality. Simple math dictates that value growth can be magnified by working with bigger companies at the start. Bigger companies have the financial resources and time to spend on strategic work. They also have internal resources for strategic input.

Larger companies will often have a senior finance professional on staff. They are, therefore, receiving strategic input from people who are already on their payroll. Larger companies may have already attracted a private equity investment. When private equity invests in a firm, they are going to want one or more board seats.

Decisions in larger companies tend to happen by committee. The owner will not make decisions without getting buy-in from their team.

All of these things are professional attributes and probably a big part of why the firm got to a larger size in the first place. It changes the type of outside help the company is generally willing to engage in.

Larger companies are usually looking more for tactical help with a specific problem rather than seeking guidance on business strategy.

Goldilocks companies get the most benefit from strategic planning

Goldilocks companies may or may not have a professional management team in place. The owner may want to get buy-in from the management team if one exists. Strategic planning involves making changes. 

Goldilocks companies tend to be small enough that the owner is still the one actually making the decision.

The owner’s political capital must be invested in the strategic growth plan in order for it to succeed. It’s good to get buy-in from key people but that will happen if the owner demonstrates a commitment to the plan. It creates alignment between words and actions.

These Goldilocks businesses are at the perfect locus of commitment, time, and size to make magic happen. It’s actually not magic though. 

There are statistically proven methodologies to grow business enterprise value and create a transferable business. These methods work if given the time, rigor, and resources. 

There are a number of resources in this discipline of business value growth. We adhere to the Value Acceleration Methodology from the Exit Planning Institute because it takes a holistic approach to personal, financial, and business. 

We have found that businesses of this size are still very much entwined with the personal and family dynamics of the owners.

Final note

The Value Acceleration Methodology and related strategies apply to revenue-producing businesses. They don’t work well for early-stage companies seeking venture capital.

The companies we serve have typically been in business for a number of years. They have been able to grow but need to professionalize their business strategy to take things to the next level.

But if you are the next tech zillionaire, you probably don’t need my help with growing your enterprise value. Revenue is not your primary concern right now.

If you own a revenue-producing company, what challenges have you had getting to the next level? How have you met these challenges? I would love to hear about it no matter what size your firm.

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©2020 by Brent Rupnow, CEPA, CFP, CLU, ChFC