Prison Break: 6 Key Constraints That Stop Small Businesses From Becoming Big Businesses

Recently I met a group of Small and Medium Sized Enterprises (SMEs) business owners who were sharing who were sharing their experiences and exchange ideas on how to grow their businesses. They were entrepreneurs at various stages of running businesses from one year to over ten years.

One lady who has been running a seemingly successful SME for over a decade brought up an interesting question that occupied most of the discussions. She asked why most SMEs struggle to grow into large enterprises. She explained that despite hard work, capital injection, strategic planning majority of SMEs are unable to break some confining walls that ensure the business remains at certain level of turnover and profitability. This happens after some years of exciting growth that plateaus at certain level. I jokingly called what he was describing the being held in the prison of smallness.

Why would theses enterprising, hardworking, passionate and ambitious entrepreneurs be held in this prison? I kept on thinking.

After evaluating my working experience with many SMEs I picked the following factors as the key constraints that combine to create this prison.

1. Unscalable Business Models.

The biggest limitation to SME growth, from my observation, has been unscalable business models.

No business can outperform its business model. A business model describes the integrated means and processes through which you are trying to achieve your business objectives- creating and delivering value to the market for profit. When the perfect combination of such means is put to the highest test they could only give a certain result at best. However hard you work your model will not get any higher results after some point. At this point we say your business model can’t be scaled any further.

Let me explain this with an example. If you were a dairy products processor you could have the following factors as some of the elements that form your business model. You keep dairy cattle, which provide all the raw milk you require. You then process and package the end products in your family run factory. You own two trucks with some delivery people who take the milk to various shops in your neighboring city. As the business keeps on growing you increase your cows, you expand your factory, buy more trucks and hire more delivery boys. But you will only be able to do this to a certain level.

At that point you won’t be able to keep more cows and therefore your raw materials will become a constraint. The factory could only expand to a certain level and the market will only be able to absorb a certain amount of your products. However, much capital is injected into this business for expansion the business will become a prisoner of its own business model. Unless the model is changed to a scalable one, the revenues and profits of this firm will plateau.

A change in model may mean a change in how the firm gets its raw materials – from self production to buy from other dairy farmers; it may also mean selling semi-processed products to other dairy products, it may mean sourcing out its excess capacity to competitors, add other products into its fold rather than focusing on dairy products only, develop a different channel of distribution among many other factors that affect its business model.

As you evaluate your business model you need to fully appreciate all the factors that drive your business and how they relate to each other. If you are a prisoner of smallness then you need to have a thorough look into your business model.

2. Over dependence on new customers

All start up entrepreneurs have great stories of their first customers. The excitement of getting someone to believe in your product or firm is essential to keep you going in the early days of the start up. Unfortunately for most SME entrepreneurs this excitement becomes an obsession and it becomes the only purpose of all its business efforts.

It has been widely believed that the most successful business is the one that has the highest number of first time customers. This is a partial truth. I evaluate business success by the number of repeat customers, how frequent the orders are and whether they are increasing with time. As a growth strategist, marketing consultant and business owner, I know how costly and difficult it is to get a customer make the first purchase. This is incomparable to the easiness of keeping a customer and getting him to make a repeat purchase.

Many SMEs owners will agree with this logic in conversations but in practice the opposite happens. You hear and see the inscription, ‘Lose them once they make the first purchase!’ In their customer dealings. You see it in the customer service, the quality of its products and weak after sale follow-up. After a customer buys don’t ask, “How do I get the next one.” But shout to yourself, “How will I get him to come back!”

3. Flawed Marketing Mindset

For big companies marketing seem to be at the heart of everything they do. They do as much marketing as money can buy. A friend who owns a SME once told me that the market budget of a competitor was more than his company’s annual turnover (not profit). SMEs are limited in financial resources. But that is never an excuse for not marketing.

Marketing is not a nice to have thing when you have money it is an essential for growing your business. Today’s business battles are worn or lost in the marketing arena. Many people seem to conclude that you have to invest all your capital into marketing. That is a fallacy. One guy who has been able to start SMEs and convert them into large organizations is Richard Branson. In his book, “Screw It”, he says that since he discovered early that he didn’t have a lot of money for advertising he had to become a publicist of own companies by becoming a news character. By appearing in the media he gets free advertising. I have just given him free advertisement in this article. You get the point.

Unless you want to remain small forever, you have to think of ways of getting marketing leverage for your business at low cost and ensure you get the highest returns possible from your marketing investments. You don’t have to be a marketing guru to do it. In our marketing course for entrepreneurs we cover various aspects of marketing your business with minimal budget- and there are limitless ways of doing so.

4. Lack of Quality Human Capital

You wish I said financial capital. This may be a challenge to some businesses. But, for those that remain small this is more of a consequence than the cause. I have consulted and trained for large organizations and SMEs and the most visible difference between the two is the number of quality of people they have in their team.

While large organizations have a large number of talented, skilled and passionate people, SMEs particularly the ones whose growth has stagnated have only one such person – the owner. That is why minus the physical and mental health of the owner many SMES end up closing doors.

When you hear of a guy who single handedly started and grew a small business into a large multinational just know that is a lie. Businesses are grown by having a wealth of skilled, talented, loyal and passionate employees. Many entrepreneurs running SMEs complain that getting and retaining great people expensive and almost an impossibility. It is difficult but not impossible.

Early last year I advised a client to go for the right attitude and develop skills with time. And for sure they are starting to experience great results from this. You need to craft a strategy and develop a culture that will attract, develop and retain the best people you require for your business. Your business will be as great as the quality of people working in it.

5. Lack of Innovation

Closely related to lack of human capital is lack of innovation. The two are directly proportional. One true measure of business growth is its innovativeness. Majority of the businesses highly admired for their growth from small start ups to success companies are not doing what they started out doing and if at all they are, they are not doing it the same way they did it in the beginning.

The yester-year giants that have stagnated are doing exactly what they started out doing. I don’t want to mention names. The world we live in is continuously changing. That which was a genius idea yesterday will not be appealing tomorrow. That which your customers fought to have last year will be highly inferior compared to what your competitors will introduce next year. How do you grow in this environment?

INNOVATE! Innovation is what fuels of business growth. You have to develop new products, create more selling channels, give your customers more flavors, more service options, different ways of communicating to your customers. Innovation will be possible only if you become more outward looking. Then align everything in your business to the external happenings and prepare for the future. Innovation thrives in a business culture that allows, even encourages, mistakes. Unfortunately this culture is a major deficiency among many SMEs.

The only person who can get away with a mistake is the owner. As a consequence no new ideas come up in the business for fear of failure and the result is being a prisoner of smallness. You will not grow the business if there is a monopoly of idea generation in the business.

6. Lack of systems that support growth

Systems are the skeleton upon which growth is built upon. Too much growth with without strong systems will result into chaos and ultimately the business will tend to shrink to the level that the system can support. Talk of Business Body Mass Index. To move from biology to architecture systems are the pillars upon which the business is built on. They can only hold as much weight as they can support.

I have been involved in assisting SMEs put in place business systems and in most cases the only system that exists in some form is the accounting system all else is dependent on whims, know-how and temperament of the people. People move, people forget, people get sick, people get bored, and all this become your business.

While systems may not completely eliminate the effects of these occurrences they drastically minimize them. You then have a predictable business that can always deliver what it is supposed to deliver regardless of the mood of the moment.

In SMEs mistakes happen all the time. Some are never discovered and corrected, some become habits. While dressing downs, reprimands and firings are the methods used to deal with these problems they are hardly the most effective ways on their own to ensure mistakes are not repeated. Systems go along way to help. If you want to break away from the prison of smallness you need to work on removing all these constraints.

Do You Know What Your Body Shop Business Is Worth?

Many smaller body shop owners have asked, “How do I appraise my body shop?” In the last month I have been asked to do two appraisals on body shops. The first appraisal was to assist in partnership dissolution; the second appraisal was for marriage dissolution. (That is what the attorneys call a divorce.) Would you like to know how to appraise the value of a body shop business?

Before we begin, I would like to make one comment. Whenever a CPA has done an appraisal of a body shop, I find that their opinion of value is much greater than the actual value the market place will pay. This is not because the CPA’s do not know what they are doing because they do; it is just that the market place places a much higher risk on buying a body shop than the accountants do. The following is an excerpt from one of those appraisals.

THE THREE WAYS TO APPRAISE A BUSINESS

1. The ASSET VALUATION METHOD. This method is basically used when a body shop does less than $400,000 a year in gross income and the seller is making wages, but no real profit above what he would be paid if working for another. On this size business, a buyer is willing to pay for the assets of the business but little or nothing for goodwill. The equipment is usually worth between $50,000 and $100,000, depending on how many frame machines the business owns and how nice a spray booth the business owns.

I have seen some specialized shops sell for more than the above number because they have a truck spray booth or another business attached to the main business. Examples of attached business might be an auto repair shop or towing operation. Also the location, size and real estate rental amount will influence the value of any business, to some degree.

2. The second method, I call the GROSS SALES METHOD. This is used when the sales are over $1,000,000 a year but the profit is unknown or financials are not available or reliable. Because of experience, a Body shop buyer can make reasonable estimates of future profits, if they have some basic information. The basic information includes rent, source of business (DRP, STREET, or a CAR RENTAL AGENCY), and the desirability of the location.

When this method is used, the value appears to be about 3 months sales or 25% of the last 12 months sales. This method is not very reliable on businesses with sales of less than $1,000,000, because the question of being profitable is very questionable. Why is this breaking point $1,000,000 in annual sales? Multi-store buyers will have well paid managers, so many figure their breakeven point is around a million.

Less than $1,000,000 in sales is not even worth their time. Of course we know that there are exceptions to the rules. Some of the exceptions are A. when a new location will be a satellite store to a bigger location. B. The buyer must have a location in a specific area to please a DRP. C. To get rid of a competitor.

3. The third and most used method of evaluating any business, including body shops, is the NET PROFIT METHOD. This method is based on the idea that a business is worth what it generates, in profit and benefits, for an owner. Body shops, like so many other small businesses, often do not show a profit, at the end of the year. Strange, how so many businesses of different sizes all just happen to end up with little or no profit. What I find really amazing is that the IRS doesn’t audit more businesses then they currently do.

As a result of showing poor profits, on the books, it becomes very difficult to use the NET PROFIT METHOD for appraising many small businesses. Luckily for me, I can quite often find hidden profits, of a business, by adding to the books, items we call owner’s benefits. These include: Owners salaries, if a corporation. Personal autos and all the related expenses used by the owner and his family that are written off against the business, fife insurance and health insurance for the owners.

Depreciation is also a hidden profit that is usually added back in to the taxable profit to help build up the total owners benefits. And lastly, personal utilities, phones, trips, etc. that are deducted on the tax return but are not really costs to run the business.

After saying all this, what is the value of a business based on the Net Profit Method? Automotive businesses, especially auto body shops appear to sell for between 1.5 to 2 years adjusted profit (book profit plus owners benefits added back in). Larger body shops doing over $2,000,000 in annual sales may sell for much more, because the owner is making much more money, than just his salary and a buyer will consider part of the profit a return on his financial investment.

Very large body shops that are being bought by public corporations are evaluated primarily on their return on investment (Percentage profit that is being made on the cash purchase price of the business.) These big buyers can afford to pay between 5 times and 10 times annual net profit, after deducting all officers’ salaries and perks.

Often these, public corporations, high purchase prices include two important restrictions, which is really why they are buying the business in the first place. First: The business is bought for little or no real money. They use restricted corporate stock that is not negotiable for two years. And second: The management is required to stay and run the company for some period of years.

The bottom-line, as I see it, is that you sold your soul, not your business. One last comment on selling to large corporations; heaven help the seller who sells his business for corporate stock or the buyers bonds and the buying company goes broke or the stock market crashes. I had a close friend sell his company for mostly cash and some seller carry back financing in Dec 1997. By Feb 1998 the buying company was in bankruptcy, making the paper my friend held worthless.

CONCLUSION: Appraising a business, especially body shops, is an art not a science. No two people will appraise the value of a business the same. I am amazed that the same thing one buyer thinks is a great asset is what another buyer thinks is a major negative. Differences of opinion are what make life interesting.

14 Ways to Improve Your Body Image

It took me a long, long time to fully understand that the struggle with my body image was keeping me from growing and expanding my entire life. I realized, in the process of struggling with my body image issues, I was disconnected from my personal power.

If I had been connected to my personal power, I would not have been critical of my body at all. I would have honored myself and only noticed my beauty and wonder. I would have taken action to create my most yummy life.

Instead, I stayed in pain and missed opportunities for fun, love, and adventure.

My BIG turning point was when I realized my body images issues were nothing but a BIG DISTRACTION keeping me in hiding, preventing me from taking risk and living the life I really wanted to live.

I deeply began to understand that obsessing about my body was a big decoy because I was really afraid of not being enough, failing, measuring up, to receive love, my life change, and so on, and so on.

I now know how to live a life FREE from struggling with body image issues, and I want to help you find this freedom too. It’s very empowering and life changing.

I learned a huge reason why we struggle. Struggling only keeps us from expanding and up-leveling our life and business. Body image issues constrict us (at every level) and deplete and drain us, and keep us imprisoned. It blocks true intimacy with life, keeping us from savoring or experiencing it fully.

When we obsess about our body, it is a huge indication that something is out of alignment within our heart, mind and life. It shows us we are disconnected from our truth and personal power and are hiding from what we are really afraid of.

Many women I have worked with have struggled with their body image. It breaks my heart because I know these women really desire a full and bodacious life with complete emotional and financial freedom.

Body image issues are a big distraction, keeping you confined from taking action and fully creating the life you want.

Here are some guidelines you can follow to move away from body image issues and into full freedom where you love your body and allow success to come to you:

Who would you be and what would do (confident, happy, blissful, really successful)?

  1. Your body is completely brilliant and takes care of all things for you. Honor it. Respect it. Fuel it and listen to it.
  2. Create a list of all the wonderful things your body lets you do. Read it and add to it often. Example: I love my legs because they take me great places and I get to see so many wonderful places with them.
  3. Make peace. Your body is a beautiful vessel that carries your soul.
  4. When you obsess about your body image, ask yourself this question: “What is it that I really want in my life that I do not yet have?”
  5. Visualize feeling amazing in your body and skin. Fully connect to it. This will instantly empower you to take better care of it.
  6. Re-focus on something that you really love about your body (you will find it be willing to look with love).
  7. Reflect on all the things you really want to accomplish in your life and business. Realize that if you shift your focus away from negative thoughts about your body, you’ll move into beautiful thoughts of achieving your true dreams and desires. This shift will instantly make you feel better.
  8. Make a list of the things you have put off due to body image issues, then go and take action on one item. Notice how fantastic this feels.
  9. Write a Thank You letter to your body for all it’s wonder and beauty.
  10. Rest and nourish your body like royalty. Rest, replenish, stretch, massage, hydrate, and moisturize it.
  11. Exercise because it connects you with your personal power and makes your body healthy, strong, and shapely.
  12. Think back to a time in your life when you felt good about your body and connect to this feeling again. You will take inspired action from this feeling state.
  13. Write a list of at least 10 positive things about yourself and add to this list daily.
  14. When you find yourself being harsh on your body, get curious and find out what your really afraid of.

Doing even one of these action items will shift your energy, connect you with your beautiful body, and move you into a place that allows more abundance in your life.