28 Jun 2015

The predictable problem of business black holes

Posted By

Darren Shirlaw is the co- founder and CEO of The Shirlaws Group.

People great. Profits great. But do you know about the mathematics sitting behind your business? If you add mathematics to your profits, people and efficiency you’ll get a dramatically better outcome.

This is the first in a series of articles describing predictable business black holes, the cycles between them and provides an understanding of how tojump your business into far greater growth.JUMP2[1]

Some 20 years ago I interviewed around 700 small businesses to discover whether the growth and stall trends I’d previously been analysing in big business still occurred in the small business market. They certainly did – and they continue to follow the same predictable path today. What’s more, the mathematics underlying all businesses work in the same way across industries, industry sectors and different currencies.

All businesses go through predictable stall points – what we’re calling ‘black holes’ because businesses can disappear into them for many years. In the small businesses market, that delay can be pretty catastrophic. Our understanding of these black holes, and what happens in between, has helped clients see why they get stuck and what to do to jump into far bigger growth.

We’ve also developed our understanding of the four trend cycles that occur between each black hole. Just think, if it takes two years on average to transition a cycle – and there are four cycles between black holes – you’ve just added eight years to growing a business. If you’d understood these cycles earlier you could have moved the business forward faster, or perhaps sold it eight years earlier.

Black hole #1: 80k

The first black hole occurs at 80k, usually when you settle on your first staff member. Given the size of the change, some people decide to stay within the 80k self-employed bracket rather than tip into 80k+ and start building their business. This black hole is the first point at which many businesses end up spiralling round and round.

Black hole #2: 750k

750k is the point at which people have typically built up a business to seven staff, each reporting to the founder. There’s no business leverage without reporting lines, yet this idea often puts the owner into a quandary. ‘I need someone who can sell/manage staff/service clients like me. But I don’t think anyone is else is quite good enough!’

If the ‘someone else’ is good enough, then the owner will have to consider releasing equity. It’s another big structural change and not everyone wants to make it. A business can grow quite nicely year-on-year until it hits 750k – only to spiral round this black hole for several years.

Black hole #3: 17m

At 17m a business is moving from an enterprise to a corporatized company, which is another massive shift. Managers in this size of business might consider creating a board with a non-exec director, and implement structural changes to release the founder from day-to-day management. The business will usually develop corporate-styled systems such as diligence, compliance and governance. It also formalises its processes, procedures and documentation.

At 750k the business couldn’t grow further without setting on more people. Now it can’t get bigger without corporatizing.

Black hole #4: 170m

At 170m the business’s markets will shift from small deals because the only way to reach the big numbers is to go global and/or partner with other corporations.

Everything has to up-scale and by 170m the business is dealing with banks at a very senior level. The business now needs effective supply chains and channels to market. Some people will resist this move and say, ‘Our client base has changed completely in the last 10 years. We used to have a lot of small stuff on the books and now it’s all big deals. I liked it better before.’

Big deals differ significantly from small deals and require a different skill set to move into major corporations or operate on a global stage. Businesses at this size need far more infrastructure investment such as improved technology, enhanced HR provision and so on.

170m is a critical point because there is no turning back from becoming a corporate once you’ve pressed the button. After helping one business grow to 170m the CEO asked us about his new role. We said, ‘You can’t be running the business day-to-day any more because your role is on the global stage. Instead you must let the heads of business lines run their businesses. And remember, you have senior non-exec directors on the board now. If they want to sack you they can.’

We added, ‘But if you get this jump right, the business will hit 220m and continue to fly.’

Black hole #5: 700m

A 700m business is transitioning one of the biggest business chasms because the next important number is 1.2bn. Adding 500m to a 700m business is an immense step requiring major structural changes.

While the CEO of a 300m turnover business is still close to that business, the CEO of a 1.2bn or 3bn business is no longer managing downstream personnel. Instead of the usual CEO-business interaction this CEO will be managing many other CEOs – a different job entirely.

Why do these black holes occur?

Most black holes are due to insufficiencies in the underlying organisational structure, but several other factors also tip a business into a black hole. Businesses neglecting to expand infrastructure and services like accounting and legal, in parallel with their core growth, will soon constrain further progress.

Avoiding black holes requires structural changes – and it’s important to remember that until you’ve completed these changes the increased revenues won’t follow.

Click here to see Darren Shirlaw introducing the concept of “Jumps” at our recent Shirlaws Client Conference.