If your business is like most small and medium size companies, you have incredible upside opportunities, if you start doing several things just a little bit better.
Skeptical? Let me elaborate why I believe that.
Most small businesses are founded by individuals who feel passionate about a commercial idea, or the very idea of running their own business. At other times, it is necessity that forces people into business when they get laid off, or when they do not find a suitable, or well enough paying job. When I started 15 years ago, I too wanted to build something, but I also needed a job that paid twice as much as any that I could qualify for. For me, it was a simple decision to make the jump.
In any event, a small business is initially fueled by the technical knowledge and passion of the individual, rather than the prevailing best practices of building a business. Initial success will be more the function of the business owner’s talents, grit and ability to attract good people. It will have nothing to do with the best practices of building a business. Therefore, it is inevitable that the growth momentum of a start up business will fizzle out when talent, grit and charisma are no longer enough.
The Opportunities of Reaching the Ceiling
According to Larry Greiner, who published Evolution and Revolution as Organizations Grow in 1968, all organizations hit the ceiling, from time to time. Whenever such a ceiling is reached, they will have to figure out how they crush through to the next level. Gino Wickman in his bestseller, Traction, describes the “5 leadership abilities” that help business leaders brake through that ceiling. These are: Simplifying, Delegating, Predicting, Systemizing and Structuring.
Now, our entrepreneur who started and successfully grew his business will inevitably encounter one or more of these “ceiling moments”. He will get stuck and will not able to grow any further. In my past career as an investment banker, I sold many companies for business owners who hit such a ceiling. These entrepreneurs decided that it was easier to sell their company than to find a path to, and financially risk breaking through to, the next level. I wish I had the tools at the time to help them figure it out, as they often left money on the table by selling too soon.
Often these companies were then acquired by private equity (PE) funds that were in the business of taking them to the next level. They did that by applying leadership practices they had picked up during their MBA programs or as apprentices with McKinsey & Co. and other blue chip strategic consulting firms.
Triple Your Profits
So where does tripling of profits come in, as I promised in the title of this article?
I am just getting to it… Private Equity groups in the lower middle market, where companies with $5-200 million in sales revenue reside, target to double or triple the value of their investments in a 3-5 year period. They need to do that in order to satisfy their investors that demand 20%+ returns as compensation for the risk of investing in a pool of small, private companies. The PE fund will need to generate even more than that on their investments to cover the expenses of running the fund and the cost of mistakes on bad investments.
In most cases, tripling the value of the business will require a corresponding growth in profits. In fact, PE funds are after exactly the same 3X Profit objective that we are talking about here.
Now, if these “financial sharks” can triple profits in 3 years, why cannot we, mortal entrepreneurs, figure out how to do the same? Why can’t we work out without the “suits” how to boost sales, increase margins and elevate our own skills and that of our employees’ and 3X our profits?
I am here to tell you that we can, using tools like EOS® or the Entrepreneurial Operating System®. EOS helps to unify your leadership team around an explicit company vision and instills the discipline, the structure and the processes necessary to execute on that vision.
So let’s look at the math behind 3X-ing your company’s profit.
Tripling your profits in 3 years requires 44% cumulative profit growth per annum. This can be achieved by growing sales and margin by just 20% each per year. Would you agree that it is not just possible, but highly achievable? It can be done for most small and medium sized businesses, by creating clarity, focus and accountability and have everyone in your company row in the same direction.
So don’t sell your business yet. Let’s take it to the next level by implementing EOS®. According to Axial.net, several PE funds, such as Evolution Capital Partners, now encourage their portfolio companies to start implementing the Entrepreneurial Operating System as soon as the ink has dried on the acquisition contract.