There are 28 million small businesses in the US. The sad reality is that most of them fail within the first few years of operation.
The small percentage that survives stay small forever. A select few manage to grow into huge businesses. But why them and not the others?
What are the factors that enable unknowns to become household brands?
One thing for sure that it takes much more than hard work, luck, and timing. Read on to see if your small business has what it takes to make the leap into the big league?
Many small business owners’ lives are chaotic due to lack of systems.
Systems are hard, but they enable small businesses to scale. Systems are not glorious like sales, marketing, or research and development. Some say that systems are boring, after all, it is a back office function. Systems separate struggling small businesses from those that grow by leaps and bounds.
Creating systems can be a daunting task, and for many, the prospect of taking on yet another project is out of the question. For some, it is a catch-22 situation. You may say “How do I carve out extra time from my already hectic schedule.”
The correct way to think of systems is that creating them is an investment in your business.
One of the greatest challenges that small business owners face is that they are perpetual decision makers. The owner is involved in everything from sales, customer service, research and development, bookkeeping, so an and so forth. Creating systems are the first step toward a business where not every decision is dependent on the entrepreneur.
Systems allow people to plug in and go. Systems include operating procedures and manuals that can bring a new team member up to speed in no time. It is what takes small out of small business.
Franchise businesses are often more successful than independently operated ones simply because they are built on systems. The franchisee may be paying a premium in upstart costs compared to an independent business, but it makes sense for many because they don’t have to worry about developing systems. Someone already went ahead and created the necessary systems for success. When you buy a franchise you are taking a system that has been proved to work.
Does it mean that you have to buy a franchise to succeed?
Absolutely not, but you have to think of your own independent business as a franchise. Create procedures for everything. Don’t leave anything to guesswork.
Most small businesses do without systems. At the same time, most small businesses fail.
While you might get away with it, in the beginning, the lack of systems will create huge bottlenecks down the road.
The lack of systems will reduce your profits. Why? Because you and your employees will have to reinvent the wheel day in and day out. systems minimize the element of surprise.
With systems in place, your team is able to deliver consistent service. Businesses with consistently good service will outperform those with fluctuating quality service.
In addition to making your life easier, systems also increase the value of your business. Buyers want to buy businesses that are built on systems. The presence of systems tells buyers that the business doesn’t entirely rely on you. Creating systems help you create a turnkey operation, appealing to buyers. Business systems are assets that enable your company to run without you.
Investors love highly scalable companies because they have the potential to multiply revenue with minimal incremental cost.
You simply can’t substantially grow a business without cracking the scaling code.
Some businesses are built to scale while others are forever destined for small business status. Unfortunately, many professional service providers are not scalable because they rely on personal output. So, if your goal is to build a big company avoid consulting types of businesses.
A software company, on the other hand, is a highly scalable business model. Once the software product has been completed it can be sold millions of times with minimal costs. In other words, their increased revenues cost less to deliver than current revenues. What this means is that a scalable business will be able to increase the operating margin as revenue grows.
A highly scalable business requires small variable costs that the company can control. Variable cost changes with the volume of business. Fixed costs do not vary with sales. For example, for a software company fixed costs include the cost of the office location, computers, and furniture. These cannot be quickly added or liquidated. Salaries, on the other hand, are a variable cost since workers can be hired and fired relatively fast.
Most consulting businesses like marketing agencies are not scalable because they are unable to substantially increase their revenue without greatly increasing their variable costs. Such businesses are considered poor investments.
To build a scalable business you should start with a scalable idea. Scalable businesses have high margins. They require low support and staff expenses. Scalable businesses allow you to work on your business as opposed to working in your business. If you find yourself constantly working in your business your business is either not scalable or not yet ready to scale.
Truly scalable businesses are highly automated. Automation helps you reduce variable costs such as labor. It is at this point when scaling and systems begin to work together. If you truly want to become a market leader or dominate your industry, scalability is the only way to do it without a miracle.
Board of advisors
If your goal is rapid growth, you must have a board that you can rely on for your big audacious goals. The life of an entrepreneur can be a lonely one. Often you feel like you are all alone with all the decisions you have to make.
Your board will share some of the burdens of making key decisions and it will tell the outside world that you are systematic about your business and that you understand that you need to surround yourself with people that are smarter than you. Your board will help you with large strategic goals. It can help with your overall business plan, policy issues, financial questions, strategic partnerships, and more.
Your board shouldn’t be utilized to deal with routine tactical challenges. Don’t waste the boards time on daily employee issues or what color the chose for your new office. Rather, let your board help you with strategic advice, or by helping you with making introductions to strategic partners and recruiting talent.
Fellow entrepreneurs and business leaders make excellent board members. Before you build your board you should have a clear understanding of what areas you need help with. Ask yourself what skills do you currently lack that you need to take your business to the next level? Is it marketing, intellectual property, or finance? Whatever it is you need help with should influence the ultimate makeup of your board. You could hire a recruiter, but they are expensive. It is best if you perform the search yourself.
Your board is not a group of your closest friends. It is a group of professionals, each with a respective specialty. One might be an IP attorney while another a retired CEO. You are not looking for a group of yes men. If you build a great board, each member will have more experience than you and each will know much more than you. If you feel like the dumbest person in the room, you are on the right track.
Your board of advisors will not join you for the money, but there are costs involved. It is a good idea to compensate your advisors. At least, you should cover their expenses. Do they need to travel to your board meetings? Are there hotel and other expenses? It is also advisable to pay a per meeting fee that might be a few hundred or a few thousand dollars. In addition to monetary compensation, you could choose to offer stock as payment.
IP (Intellectual Property)
Most small business owners care most about time and money. Some understand that IP is as good as money in the bank.
IP is considered one of the most important assets of some of the most valuable companies in the world. Even though IP is an intangible asset, it’s almost impossible to build a hugely successful business without it. If you are going to dominate your industry or at least be one of its key players, IP is a must. You can often read about huge business acquisition deals structured around IP. Often, IP is the reason companies are bought and sold for huge multiples.
Simply put, IP makes your company more competitive. Without IP you end up competing on price and efficiency, a tough way to build your business. When you compete through IP you often set your own price, a luxury most businesses never experience. Since innovation is the main driver in business, developing IP should be a key objective for all companies that want to enter the big league.
If you are an early stage company wanting to attract investors, your IP might be what closes the deal for you. Investors look at IP with regard to the level of income it may generate through its life. Some companies bet their futures on IP. Richard Thoman, the CEO of Xerox, declared that the “management of IP is how value added is going to be created at Xerox.” An excellent example of IP management is IBM; it managed to generate about $1 billion from IP by 1990. IP is the intangible asset that can become your free cash flow.
When IP is properly managed it can prevent your competitors from copying your products or services. You can avoid wasteful investment in R&D. IP is a revenue generating profit machine that makes your company more valuable and competitive, getting you ever so closer to market domination.
Many small business owners, wrongly believe, that brand building is reserved for giant corporations. But, building your brand should be a key focus from the very early stages of your company’s life. Your brand is another intangible asset you can’t build a market leading company without. It is your brand that may enable your business one day to avoid competing on price only. It is your brand that may one day help you dominate your market. It is through the power of your brand that you will be able to minimize your new customer acquisition costs.
Successful brands are easily recognizable. Coke, Apple, Starbucks, and virtually all fortune 500 companies have managed to build a strong brand image. Powerful brands instill certain images in consumers from tradition to quality, to innovation, to any number of thoughts and feelings. As competition increases, so does the importance of building credible brands.
Brands are not born out of thin air, they are strategically developed. Building your brand is no less important than developing your sales strategy or R&D. The process of building your brand is a never ending job. There is no such thing as a finished brand. Finished brands are for businesses that are finished. You can never think of brand building as a project with a beginning and an end.
While advertising is important it is not advertising that creates your brand. Your brand is a reflection of everything that your company does. Your brand is the quality of your product or service. It is also the way you treat your customers and even your employees. Your brand is shaped by how the world perceives you.
The value of each brand fluctuates. Your company scores big on your latest product and the value of your brand rises. One of your employees publicly ridicules one of your upset customers and your brand suffers. The good news is that for the most part, you are in charge of your brand’s destiny.
Even the world’s greatest brands are not always on an upward trajectory. Strong brands can help your company survive disasters. Recently, the Toyota brand had been plagued by millions of recalls, yet the company managed to come out of it all with an even stronger brand.
It is true that not each small business wants to become an industry leader. But, it’s also true that there are no accidental market leaders. Most small businesses are family owned and operated, and there is nothing wrong with that. You can be happy, fulfilled, and wealthy running a small business. But, if your choice is to grow your business into a true market leader you have to build your business on systems. You have to be able to crack the scaling code, so you can dramatically increase your revenue with minimal expenses. You will need trusted advisors that are smarter and more experienced than you. It will be an uphill battle, or perhaps even impossible without proper IP management. Your brand will soften the blow when you are hit with disasters. Of course, there are other factors such as luck and timing that transform small businesses into huge success stories, but the above five make for a good start.
Companies that develop partnerships are more likely to grow and succeed. Partnerships decrease your business development costs. The right partners can also help you during an economic downturn.
There are several types of partnerships:
Integration partnerships – Your company could integrate a service or product with another. For example, Freshbooks integrates with Zenpayroll. It enables both companies to grow faster.
Co-branded partnerships – This happens when brands join each other to do something big. An example would be Visa and the Olympics. Other examples are when Apple and Nike brought music and sports together, and Best Western developing a reward program for Harley-Davidson riders.
Distribution partnerships – Distribution partnership happens when one business promotes or distributes the other companies product. This happens frequently in the entertainment industry when one TV channel distributes a production company’s programs. Another example would be a company with a new energy drink could partner with a beverage distributor.
photo credit: Save The Planet