Business owners share a common goal — we’re looking for freedom. We want the ability to call our own shots. We want to be able to work when we want and on the projects we choose.
That is not possible if your company isn’t scalable. If your company isn’t maximizing revenue unless you’re doing most of the work, you’re not scalable. You’re stuck in the owner’s trap.
From the outsider’s perspective, it looks as if you’ve got it all together. However, you may be trapped and not even know it. Perhaps you’re so used to the cage that you don’t even recognize the bars anymore.
Many business owners are accidental entrepreneurs. You’re good at your craft, so, you broke out on your own, seeking freedom. Your company grew because you’re good at what you do. So good that, although you started your own company to sell widgets, your customers asked you to also sell them blivits.
To keep your widget customers happy, you feel you need to expand your services to something you are not an expert in. And, unfortunately, neither are your employees. So, the customers tend to come to you for your expertise, bypassing your well-paid employees because the clients know that they don’t have the same level of knowledge as you do. That also means they come to you, and only you, when something goes wrong. You respond, which reinforces the customer’s reliance on you.
You get stuck in this trap. Business slows when you’re not in the office. Your company can’t work on all the projects you closed because your team is underutilized. And your revenue hits a plateau because the business can only grow to the capacity of the owner. Scalability is the answer.
In addition to improving the sales of your company, scalability enhances the value of a company. The average multiple offered to companies for sale is 3.76 times EBITDA (earnings before interest, taxes, depreciation, and amortization). When the owner gets involved with each customer personally, that multiple drops to 2.92.
You may enjoy getting involved with every issue personally, but is that how to best serve your customers? Is it the way to help more customers? No. The ability to deliver massive value to your customers is not through your craft skills, but your business skills. It’s about how you systemize and scale the delivery of specialized services.
There is a fundamental misconception that if you scale up, that you’re somehow watering down. However, it’s efficiency that allows you to deliver better service to more people.
In addition to gaining your freedom, getting your business to a point where it isn’t dependent on you makes it more valuable. Companies with owners who rarely get involved with serving individual customers receive offers with an average multiple of 4.54. (If you want to keep working on your craft with your customers and not plateau in sales, you can hire a CEO. But, that’s a different column.) You want to get to a place where your company is not personally dependent upon you.
To escape the trap, consider streamlining your business so that instead of selling lots of things to few customers, you sell a few things to lots of customers. This feels uncomfortable to some owners because selling lots of things makes them feel like they can attract more customers. But, there is some nuance to this because, for example, if you own a grocery store, you may benefit from selling many items. However, there is a difference between selling an eggplant and a customized kitchen set or selling paper towels and installing a bowling alley in the bread aisle.
You may believe that by tailoring your products or services to each customer’s individual needs, you’ll be more competitive. But, if you don’t follow the steps to automate systems or allow employees the opportunity to handle specific tasks, your business will struggle to take market share. (By the way, part of the solution is to stop taking on every customer and instead only say “yes” to the people who will benefit the most from your services.)
To determine which products or services you’ll have the most success scaling, examine them to determine which score the highest on the “scalability trifecta.” To score high on the scalability trifecta, the sales or service process must be 1) teachable to employees, 2) valuable to customers, and 3) repeatably purchased (TVR).
You, the owner, want to focus on high-value tasks. You don’t want to be spending much time on $15-per-hour work when you could be doing $150-per-hour work. Doing so means you end up doing work that won’t grow the business.
Once you’ve determined what is TVR, document the process for delivery and coach your employees on how to handle it. You’ll want to test your instructions by having a team member deliver the process without your involvement. But, don’t commoditize your product or service. You should name it and be able to illustrate the process. This differentiates you from your competition, which gives you pricing power.
The most valuable things to your customers aren’t just dynamic deliveries, but differentiated ones.
As you have this conversation with management, you might recognize that your most valuable products and services are also your least teachable. Conversely, the things that are the most teachable may be the least valuable to your customers. Darren Root, of Rootworks Accounting, found this to be true.
Like most startup accounting firms, Darren was doing a little bit of everything. For example, he’d get paid handsomely in the corporate finance area, but that skill was not easily teachable. Darren also provided a list of other, less-valuable services to his clients, such as payroll, recording daily deposits, creating monthly financial statements, and reconciling bank accounts. All of which were very teachable, but by themselves, none was very valuable to his customers.
They were viewed as commodities more than valuable services. Darren bundled all these teachable/nonvaluable services and sold them as a bundle called BOSS (back-office support system). The bundle became a valuable service because it meant that his clients could outsource this solution instead of hiring back-office personnel.
Following these steps helps business owners operate at the level that is most valuable to the firm. You wouldn’t want your top-paid employee being distracted from their most important work; you should hold yourself similarly accountable. Don’t let the owner’s trap rob you of your freedom while also suppressing company growth.
This article originally appeared in The Berkshire Eagle on October 9, 2021.