I recently wrote about buy and build; versus buy or build. Shortly thereafter I saw a question posed on Twitter regarding the obstacles. This is my attempt to share those obstacles:
- Market saturation – most small, service businesses are constrained by their geography. You are not the best HVAC company in the area. You are the best remodel HVAC for top 1/3 home values in your region, but excluding the top 1%. There are only so many of these before you run out of homes that need your service.
- Leadership – at some point all limitations are on the leader. In most small businesses, the earnings and risk can be optimized for the owner-operator. As his or her skillset develop, so too does their appetite for risk, work and time. Opening up more locations, creating new business lines or acquiring new lines of business become a personal choice. Too many commentators accuse the Peter Principle. In my experience, it’s usually a choice. The owner-operator finds a local maximum and lives there –happy. I don’t want to dwell on this constraint because there is a lot written on it. I just want to point out that while this is a constraint, and perhaps the “ultimate” constraint, it’s a cop-out to an article like this.
- Customer Concentration – most companies don’t grow in a smooth path. They phase change. Small business owners know this because it’s in their recent memory. The exception is the sales-heavy organization that can outsource a lot of the inventory or service; or use software for the service. If you want to 10x your SMB you are going to need to land a huge customer. You’ll have to sell a customer that is 50% to 200% of your current revenue total more than once. This will freak out every single person on your existing team. Then you have to deal with the ramifications. Then, just as you get that “done,” you need to do it two or three more times. Most people just don’t have the pain tolerance for doing it multiple times. If you happen to design a business than grows at 2% per month like clock work you’ll grow at 25% CAGR for 10 years and achieve the 10x scale in a very respectable time… and maybe not have to dilute yourself. The size of the deals you pursue need to be big enough to matter. And then you’ve got to prevent them from destroying what already exists.
- Complexity – Features help small businesses beat large companies by providing a more unique, more valuable solution. They take on risks that the big corporation won’t. This helps them win deals, but makes it difficult for them to scale. Complexity sometimes gets blamed on leadership, too. But, sometimes owner-operators like solving certain types of problems. They are complex enough to make a fat margin, but not too complicated to split into two problems; and scale up the easier/more profitable one. In order to scale you will have to simplify the business. This means saying no to things you are capable of doing but shouldn’t because it dilutes your main thing. If you have been growing steadily, you’ll need or want the cash from the fat margin, but complicated. Saying no to growth is hard when you are trying to 10x. It’s possible but you must cut out complexity every single day. K.I.S.S.
- Capital – most SMB’s lack access to outside equity capital. They lean on debt and retained earnings. This is not a bad thing. The answer usually is not capital but redesign of the business. However, liquidity can prevent an otherwise good business from 10x-ing. Lack of liquid cash will also prevent them from starting or landing a job that they cannot finish. Why sell that huge customer if I cannot afford to deliver it? How can I raise capital without the sales order? I guess I’ll just save up. This takes time and then the opportunity (and ambition) fades. Repeat this every day for several years and the SMB owner reverts to optimization at the local maximum. I like to say, “solve problems with your brain not your bank account.”
There are thousands of other obstacles. I threw this together.