Success of an SME means they have crossed that shark filled river where most SME’s fall over.
They have sufficient scale to employ functional personnel to address the day to day running of the business, and are returning the cost of capital and a bit more to the owner.
For some this is a level of comfort that is satisfactory, but to most who have strived to get across that river, it will not be enough, they are of a personality type that will be looking for the next challenge.
So where should they look?
Do yourself out of a job.
When you can go away for 3 months and wonder why nobody missed you, the business has reached the point where you are no longer needed daily. Accept that and get a life, or knuckle down to scale the business. For many that might mean becoming a non-executive chairman, staying engaged, but well away for the week-to-week challenges. You have created a manager system and ‘bench’ that does that. Leverage it.
Identify the industry constraints.
Every industry has a set of constrains that are rarely even noticed, they are just the edges of the status quo. Every useful innovation that has evolved, has done so by addressing a constraint that few, if any had even seen. The outcome of this insight is to deliver the opportunity for significant value addition.
The exempla was Steve Jobs. He saw the constraints in personal PC’s when he saw the work being done at Xerox Park developing a Graphical User Interface. When deployed in the Mac, the GUI changed Apple from a hobbyist into a leading PC. He repeated the magic with the original iPod, then the iPhone, and the App store. Each of them operated in an existing environment, with existing technology that could be deployed in ways that removed the accepted industry constraint, changing the face of that industry. You do not need to be a huge organisation to do this. In my local area there is a plumber who guarantees his work, and guarantees the time he will turn up to do it. Failure to address either means the client does not pay. He charges a significant premium, and now has a number of vans on the road, simply because he redefined an existing constraint in this local area.
Identify and remove internal constraints.
As with an industry, every business has a range of internal constraints that together become the culture and status quo in that enterprise. There are always opportunities to do things better, but are often overlooked, by simply not being seen, or miscategorised.
A former client removed an internal constraint and added 10% to his gross margin overnight by doing so. The business, a medium size in his industry had kept three suppliers of the core item in his manufacturing operations holding roughly equal share of his business, for roughly equivalent products. There was little to no internal competition, each of the suppliers did so from their price list, while maintaining very friendly relations with the MD and purchasing manager. We instituted a competitive bid for a guaranteed 80% of the purchases, with the remaining 20% to go to the runner up as a consolation prize, and ‘backup’ to the major supplier. The cost reduction that came from that relatively simple exercise dropped straight to the bottom line.
Currently the evolution of AI is creating huge opportunities for enterprises to deploy tools that will optimise existing processes and enable scaling at little or no added cost. There is a learning curve, an investment required, but not engaging means you will quickly fall behind competitors, while ignoring the opportunity to go quickly past them.
Build performance consistency.
For those with a view to one day selling the business they have built, there is no substitute for being able to show consistency of performance over time.
Even when an exit is not even contemplated, seeking ways to build consistency has the result of simplifying an enterprise which almost automatically adds margin and cash.
To build performance consistency takes time and effort. It requires a combination of being ‘in the weeds’ implementing processes that recognise and address tactical and operational improvements daily, and taking a ‘helicopter’ view that enables strategic positioning. This combination is easy to say, hard to do.
A buyer is buying two things, both of which are extremely valuable, irrespective of the inclination to exit the business:
- Optimise the existing business processes and infrastructure,
- Map the path that best delivers future cash flow.
Demonstration of positive performance consistency on both these parameters will give you back time, and optimise the buying price if and when you exit.
Header credit: My thanks to Hugh McLeod at gapingvoid.com
