Two Bottlenecks to Business Growth: Owners and Management

I begin this post with a short story about an owner who found himself in a typical situation. (I’ve changed his name and circumstances to protect his privacy.) The actions he took to extract himself from this situation and achieve his exit goals are a blueprint for building business value.

As soon as Oliver Dielsen walked into my office, I sensed his frustration. He had scheduled a meeting to talk with me about exiting the precision metal fabrication company he had started 25 years ago when he was 33. Dielsen Steel had grown from 2 employees to 25 and increased its revenues to $4 million. Oliver brought home $250,000 in pre-tax income as well.

However, over the past four years, growth, revenue and cash flow had stagnated. Oliver and Pedro, his right-hand man and principal manager, had tried everything to increase revenues and the customer base. Oliver wanted to exit in seven years and maintain his $250,000/year lifestyle, but his advisors showed him that Dielsen Steel had to triple in value to yield enough cash to satisfy Oliver’s financial security goal.

Financial security wasn’t Oliver’s only exit goal. Equally important was his ambition to create a “world-class company” (an exacting standard in the best of conditions). Out of the thousands of companies in Dielsen Steel’s market niche, Oliver considered four of them to be world-class. He wanted Dielsen Steel to become the fifth before he sold it.

Like many owners, Oliver was a smart, hard-charging entrepreneur. He and Pedro had been working together for years at top speed, but Dielsen Steel was coasting while Oliver worked as hard as ever. Now, Oliver realized that he had seven years to close a huge value gap but didn’t have a clue how to do it.

Seven years after our meeting, Oliver sold Dielsen Steel to a world-class company for $39 million ($36 million for the company and $3 million for the building and property). How did he do it? As we’ll see, Oliver’s success was the result of good fortune and a commitment to change.

Oliver was a smart owner. He knew his craft and market well, and his customers were loyal to him. But he had tried every strategy he knew to grow revenue and earnings, and nothing worked. “What should I do?” He’d ask me. “What can I do?”

Bottleneck #1: The Owner

In my last post, The #1 Reason Boomer Owners Are Not Exiting Today, I suggested that owners must change their roles from “critical” to non-essential to create the necessary environment for rapid growth. As gently as I could, I suggested to Oliver that he consider removing the first bottleneck to growth: himself.

Suggesting to owners that they need to change their roles is not an easy conversation, so I usually bring in a Big Gun to back me up. In this case, the Biggest Gun is Peter Drucker. In his book, The Essential Drucker (2001), he wrote,

As a new venture develops and grows, the roles and relationships of the original entrepreneurs inexorably change. If the founders refuse to accept this, they will stunt the business and may even destroy it. But even among the founders who can accept that they themselves need to do something, few know how to tackle changing their own roles and relationships. (156)

So, what could Oliver do to address this? The answer lay in overcoming his second bottleneck.

Bottleneck #2: The Management Team

The second bottleneck, one only slightly less difficult to discuss, was Oliver’s management team. Oliver depended on two managers, the first two employees he’d ever hired. Not surprisingly, they mirrored Oliver’s experience and capability, and like Oliver, had no experience working in a bigger company. To grow Dielsen Steel to the next level rapidly, Oliver needed next-level managers.

Next-level management is the mother of all value drivers because management directs the future course of the business enterprise.

I strongly suggest that you do “what private equity firms have figured out how to do: Attract and keep the world’s best managers, focus on them extraordinarily well, provide strong incentives, free them from distractions, give them all the help they can use and let them do what they can do” (Colvin and Charan, 2006, “Private vs. public”).

Private equity groups use this strategy to create outsized returns, so I asked Oliver to imagine what Dielsen Steel could do if it did the same.

Next-Level Managers

Next-level managers are managers who work at companies that are larger, often much larger, than yours. They know how to grow a company to at least the level of the larger companies they’ve worked for. These managers have worked with the customers, vendors, advisors, consultants and others in the market you aspire to work with. They know how to train, develop and manage the people in your organization to move it to the next level: the level you need be at to exit on your terms. They understand Drucker’s concept of delivering value to your ideal customer: how to market, organize and focus on the wants and needs of the consumers you want as your customers (Drucker, 2001, 145–148).

This isn’t to say that your existing managers can’t grow your company to the level you need. That is a determination you must make, perhaps with the assistance of an outside management consultant and existing advisors.

Existing managers certainly can drive growth at the necessary pace if your company is already growing at a pace that will satisfy your financial security goal. If the rate of growth isn’t on track to achieve your goals, your existing managers, with additional training (perhaps working with outside consultants and coaches), may be able to improve the company in ways that produce the results you want and need.

That’s what Oliver did. He hired top-notch management talent (that he could barely afford) from a much larger business and, once he was comfortable with the direction and pace of growth, he removed himself as President and CEO of Dielsen Steel.

Oliver didn’t contribute significantly to the tremendous growth that occurred under new management, but his decision to make the changes necessary to grow the business was key.

In my last two posts, I’ve made the case for owners to reassess their roles within their companies and the capability of their existing management teams to achieve the rates of business growth owners need to exit successfully. As difficult as these changes may be, they are far easier to make early in the process, before desperation to exit sets in.

In a future post, I’ll discuss how Oliver’s advisors designed an incentive and retention program for managers that ignited their commitment to the rapid growth of Dielsen Steel.

 

This article was written by John Brown from Forbes and was legally licensed through the NewsCred publisher network. Please direct all licensing questions to legal@newscred.com.