Archive for the 'Entrepreneurship' Category

Finding success in the Tour de France and small business

If it’s July, one of the most amazing athletic competitions in the world is being staged. Since 1903, the Tour de France has been the pinnacle of professional bicycle races, and arguably the most grueling of all sporting competitions.

Contested over 23 days, with the 21 stages averaging more than 110 miles each, there are only two days rest in the middle. These super-athletes from all over the world navigate diverse road conditions, rain, wind, heat and legendary mountain ranges - no less than the Alps and Pyrenees - that God surely made for us to ski down, not pedal up.

If the sun’s coming up on Main Street, millions of small business owners also mount one of the most grueling competitions in the business world merely by opening up. Against all odds, they start, run and grow their operations in conditions few corporate America CEOs would be willing to face. But unlike the Tour de France, small business owners run their race every day of the year.

Combining my admiration for both of these types of super-humans, I’ve identified four required elements to be successful competing in the Tour de France or in the marketplace.

1. Teamwork
Tour participants are part of a couple dozen sponsored teams of about 25 members, each have individual roles to play. Some members are supportive non-riders and some are riders whose primary role is to protect and push their leader. But all work together to meet team performance goals, including getting their leader on the podium at the end of the day or the end of the race. Sounds a lot like a small business, doesn’t it?

Since every day in a small business can be like a mountain stage on the Tour-grueling assaults on impossible peaks and dangerous descents into the valleys-success requires the ability to motivate your team to work together effectively. And a smart leader knows that sustaining successful teamwork requires sharing the recognition, so the team doesn’t mind if you’re the one on the podium.

2. Communication
Competing in the Tour is like running 21 marathons in 23 days while simultaneously playing a 3D chess match. Effective communication between team members is critical so each can deliver their unique contribution to the overall strategy at the appropriate time.

Even the best small business strategy in the world must be communicated to the team in ways that inform, coordinate, motivate, foster engagement and result in success. And the customers and competition combine to create the 3D degree of difficulty.

3. Preparation
All you have to do is watch a Tour de France cyclist in an “above category” mountain stage to see successful preparation. These guys have turned their bodies into human spring steel as they become one with their bikes.

The small business equivalent is to operate your business at the highest professional level possible, at all times. One major differentiator of professional organizations is their commitment to investing time and resources - this means budgeting both - for education, training and practice for all team members.

4. Technology
Tour de France teams leverage technology at every point of the competition, including high-tech bikes, customized chase vehicles, on-course communication tools, etc.

In the 21st century, every small business has to apply technology at essentially every level of its operation. The good news is the barrier to entry has never been lower to extremely powerful technology in the incremental portions small businesses can use, and affordable prices they can afford. Small business Luddites become Troglodytes.

Out here on Main Street, if you don’t develop a high-functioning team, communicate well, achieve a high level of preparation and maximize technology, you will be irrelevant.

Or, as they say on the Tour, you’ll be “off the back.”

Write this on a rock … Customers will tell you about their changing expectations - let them.

It Was The Best of Times, It Was The Worst Of Times

Contemplating the current economic and entrepreneurial conditions out here in Main Street America, I keep thinking about this perfectly paradoxical passage from one of the great literary masterpieces:

“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of light, it was the season of darkness, it was the spring of hope, it was the winter of despair.”

Perhaps you recognize the opening paragraph from A Tale of Two Cities by the immortal Charles Dickens. He was providing analysis of the disruptive state of affairs in 18th century England, as well as across the Channel, in France. If you know about the disruptive state of affairs in the 21st-century marketplace, perhaps you’ll appreciate the allegorical reference of these phrases for small businesses almost two and a half centuries later.

It was the best of times: “The more high tech we have, the more high touch we will want.” The reason John Naisbitt’s 1982 words will always be prophesy is because humans will always be analog beings. There’s never been a time when the high touch leverage of a small business has been more powerful against the high tech of big competitors.

It was the worst of times: Tech behemoths like Amazon, Google and Facebook are increasing digital leverage to create new customer experiences and expectations. This trend is deadly for those hidebound small businesses that won’t infuse their sublime high touch with incremental high-tech to produce irresistible, Main Street special sauce.

It was the age of wisdom: Unlike the 20th century, today there are few hidden rules or proprietary tools employed by big businesses that aren’t available in some form to small firms. Digital leverage and data are increasingly available in incremental and affordable forms, but you’ll have to risk what you know for what you might learn.

It was the age of foolishness: In the most transparent era of management fundamentals, the keys to sustained success are lower than low-hanging fruit – they’re on the ground. And yet, innumerable small businesses are following Sears and Macy’s into the realm of irrelevance rather than adapting to new customer expectations with high-touch intangibles, relevant 21st-century practices, and affordable – many free – new tools.

It was the epoch of belief:  In many ways, the path to entrepreneurship has never been easier. A sweet byproduct of democratized digital leverage is a lower capital barrier to entry. Plus, the expansion of the universe of niches (read: niches of niches) is creating unprecedented small business opportunities.

It was the epoch of incredulity:  It’s still easy to start a new business, but it’s never been more challenging to sustain one. New and evolving customer expectations must be served with fresh data and effort – every day. And competitive disruptions are emanating from improbable market sectors.

It was the season of light:  The illumination and availability of customer data for small firms is unprecedented. Extensive information about business prospects is opening doors to the now-illusive, face-to-face appointment. And response behavior of retail prospects is available to help design and deliver a high tech/high touch marketing strategy.

It was the season of darkness:  At the same time, qualifying a suspect into a prospect into a customer has been disrupted by a more informed prospect base. As the selling cycle lengthens for those who fail to recognize this shift, diminishing gross profit erodes equity, burns available credit, and then – well, you know.

It was the spring of hope: One of the most amazing forces in the marketplace is the pathological optimism of American entrepreneurs. Against all odds, they navigate their dreams around the wreckage of peers that were sunk by the reef of disruption.

It was the winter of despair: I never thought I’d see conditions that would so restrict the entrepreneurial energy of America. The past decade saw anti-business political policies, unprecedented demographic shifts and behaviors, distressed economic conditions, and restricted capital and disruptive pressures combine to set back entrepreneurship in America for the first time in generations (Kauffman Index Startup Activity).

The human experience is pregnant with paradoxes, and no sector more so than the marketplace. Digital leverage is at once creating the paradox of exciting opportunities and unprecedented disruptions.

You would be correct to point out that humans have lamented change for millennia, but this really is different. Not change itself, but the velocity – the compression of time between changes.

Past changes have occurred at the velocity of analog – the speed of sound (761 miles per hour). Today’s change is powered by digital – at the speed of light (186,000 miles per second).

Are you adapting to new expectations with your high touch/high tech special sauce? Or are you being disrupted on the way to – well, you know?

Write this on a rock … The best of times or the worst of times? The choice is yours.

Claim the stealth benefits of small business ownership

The classic financial benefits derived from small business ownership typically fall under two categories:

1.  Earned income: salary and bonuses reported on a W2 each year.

2.  Unearned (investment) income: distribution of profits from the operation and/or sale of the business.

But there are other small business ownership advantages that I call “stealth benefits,” because they’re not as evident as operating opportunities. Arguably the most dramatic stealth benefit, which often has the most wealth creation potential, is for the business owner to also personally own the real estate in which that business operates.

Here’s the classic scenario: Every business is a tenant of some landlord, likely under the terms of a commercial lease. There are many financial and strategic reasons for a small business to lease property from an unrelated landlord. But that arrangement offers the business tenant only tax deductions of the lease payment and associated disbursements, and essentially no financial benefits for the owner of the tenant business.

Now let’s consider the stealth benefit mentioned earlier. As long as the business you own is legally structured as a tax reporting entity, like an S Corp or LLC, you can accrue stealth benefits by personally owning the real estate your business operates in and leases from you. For example: Smith Enterprises, Inc. (SEI), a small manufacturer, has one shareholder, Tom Smith. SEI enters into a long-term, formal lease of the improved real estate it operates in, and the landlord, the individual who owns that property, is the same Tom Smith. Several of the stealth benefits these two entities accrue from this legal arrangement include, but are not limited to:

  • SEI doesn’t have to worry about prohibitive rent increases, or getting kicked out because its landlord, Smith, won’t renew the lease.
  • As with any lease, SEI deducts lease payments and associated disbursements as operating expenses.
  • As owner and landlord, Smith personally deducts expenses necessary to deliver on the lease agreement, including mortgage interest, depreciation, maintenance, etc.
  • Profits arising from this venture are taxed as unearned (investment) income for Smith, calculated at his personal income tax rate, but – and this is important – not subject to payroll tax.
  • It’s possible that Smith could receive cash distributions from the property, even if the investment delivered a loss.
  • Over time, as inflation causes rents to rise against mortgage payments that may be fixed for that period, cash distribution will likely increase each year.
  • When the mortgage is paid off, the income-producing property becomes a cash-producing annuity for Smith.
  • Upon the ultimate sale of the property, basis-adjusted profit is taxed at the current capital gains rate, which is typically lower than Smith’s personal income tax rate.

In my long career, I’ve seen many family businesses that Mom and Pop founded and operated for decades. But at the end of their business careers, it turns out that the business itself had little or no value to a prospective buyer, and the founders just locked up the business one last time.

However, concurrent with operating their business, Mom and Pop also went about acquiring the property their business operated in, and leased it back to the company. Over those same decades, that corner of an intersection, in a once-sleepy section of town, became a valuable piece of commercial property.

In the end, Mom and Pop made a good living from operating their business, which ultimately was worth essentially nothing. But they retired well by selling the real estate they’d bought for thousands, for millions. Oh, and they actually have one other option that might be preferable: Just continue to lease the property to the next business.

And almost all of this, including years of rent distributions, was taking place under the marketplace radar, as a stealth benefit.

Write this on a rock … Take advantage of the stealth benefit of owning the real estate your business operates in.

Remember America’s militia on Memorial Day

This is Jim’s traditional Memorial Day column.

Reasonable people disagree on the exact origins of what is now called Memorial Day.  But most accept that the practice of decorating the graves of Americans who died defending their country began in earnest by women of the South during and following the Civil War.

On May 5, 1868, General John A. Logan, National Commander of the Army of the Republic, was the first to make Memorial Day official with General Order No. 11, which stated in part that, ” … the 30th day of May, 1868, is designated for the purpose of strewing with flowers or otherwise decorating the graves of comrades who died in defense of their country …”

Since then, other than Congress making it a national holiday and changing the date to the last Monday in May, America has honored its fallen heroes from all conflicts in pretty much the manner that General Logan anticipated with the language of his order, whereby  “… posts and comrades will in their own way arrange such fitting services and testimonials of respect as circumstances may permit …”

When America issued its first call to arms - before it was a country, before there was a standing professional army - that call went to the militia, which was identified as, “all able-bodied men.”   Calling themselves the “Minutemen,” because they could be ready to fight on a minute’s notice, they were primarily shopkeepers, craftsmen, farmers, etc.  Today, we call them small business owners.

From as far away as Scotland, America’s Minutemen were impressive. Writing about the colonies’ quest for independence from England in his classic work, The Wealth of Nations, Adam Smith predicted America would prevail thanks to its militia which, ” … turns from its primary citizen character into a standing army.”

By the 20th century, state militias had become part of the National Guard. And by 1916, the National Defense Act created another layer of citizen soldiers, the Reserves.

Prior to the war with Spain in 1898, latter-day Minutemen served only on American soil. But ever since, including two World Wars and four major conflicts, America has deployed citizen-soldiers around the world alongside regular forces. Indeed, in Iraq and Afghanistan, Guard and Reserve members accounted for one third of U.S. forces, as well as a comparable percentage of casualties.

Whenever they’ve been called, small business owners and their employees have left the marketplace to demonstrate their courage - and die, if necessary - on the battlefield. So this weekend, as we honor all who paid the ultimate price in service to this country, let’s also remember the long tradition of America’s small business volunteers who’ve answered the call, and served faithfully in harm’s way on behalf of a grateful nation.

Write this on a rock … America owes much to the sacrifice of those heroes who’ve turned from their, “primary citizen character into a standing army.”

Take on the law of numbers with grit and fundamentals

A rabbit was being chased by a hungry fox. Running for his life, he hopped over a turtle as he made haste across a small stream. Tucking himself safely inside his shell — not wanting to become collateral damage in the rabbit’s emergency — the turtle inquired about his anxious neighbor’s prospects, “Hey, Mr. Rabbit. You gonna make it?” To which Mr. Rabbit replied over his shoulder, “I GOTTA make it.”

When small business owners wake up in the morning, they often feel like Mr. Rabbit. But why are so many operating so close to the edge of survival? Why is every challenge or opportunity so momentous? Why are their circumstances so much more dramatic than for their Big Business cousins? The answer is found in the law of numbers. Let’s look at just three key examples:

Customers
Big businesses have lots of customers, so losing one is usually not a big percentage of their customer universe. A small business’s customer universe looks more like a list, on which each name represents a much larger percentage of the total. Losing a sale or customer takes a bigger mathematical bite out of the future viability of any small business.

Employees
When an employee leaves a big business, there are probably three replacements ready to be promoted off the bench to that single assignment. But even if there is a bench on a small business team, it isn’t deep. And since there are more jobs to do in a small business than people to do them, every employee is a key employee who’s difficult to replace.

Capital
Big businesses are blessed with multiple capital options, including the equity and debt (bonds) markets. A small business is the stepchild of the capital markets – sometimes more like an orphan. Other than bank loans and whatever retained earnings that can be held onto after taxes, the best way to describe other capital acquisition options is found in the names of the twin brothers of desperation, Slim and None. And even when outside capital is found, it often comes at a prohibitive premium.

With the law of numbers and perilous percentages against them, translating into limited options, small business owners survive by calling on a special kind of “I GOTTA make it” resolve. But, alas, resolve alone isn’t enough. To overcome the reality of their numbers and operate with less desperation they have to combine their grit with a focus on operating fundamentals that address the exposures. For instance:

  • Customers: Know what each expects from you and deliver that within an inch of their lives. This is part of your special sauce and one of your advantages over a big business.
  • Employees: Hire only those who could one day be promotable off of your bench.
  • Capital: Build and maintain good relationships with at least two banks, and retain earnings like your business’ life depends on it. It does.

During The Second Punic War (218 BC), Hannibal crossed the Alps with 35,000 men and a squadron of elephants. When snow blocked their progress, scouts reported the way forward was impossible. Sensing disaster in the eyes of his men, and realizing that this was a test of his leadership, the great Carthaginian general is said to have uttered those words that small business owners say to themselves, and their people, every day: “We must either find a way – or make one.”

Write this on a rock … Like rabbits and generals, small business owners GOTTA make it with a combination of grit and fundamentals.

Eight questions and four fallacies about business growth

Giant sequoia redwood trees grow very tall. Bradford pear trees, not so much. It’s all in the genes.

But there’s no genetic code for a business. While a Bradford pear can’t decide to compete with a redwood, a business can become whatever its owner makes it. And that last fact creates two questions we go to sleep asking ourselves and wake up trying to answer:

1. Should I grow my business?
2. How big should I grow my business?

In his book, Warp Speed Growth, my friend and Brain Trust member, Peter Meyer, lists four fallacies of growth which every business owner should consider. Here they are, each followed by my comments.

Fallacy 1. You can grow out of organizational problems.

In a state of denial or ignorance, small business owners sometimes think getting bigger will fix management and organizational shortcomings. If a tree is bent, fertilizing it won’t make it grow straighter – only faster in the wrong direction. If you have organizational challenges, don’t grow until they’re resolved.

Fallacy 2. Growth equals profitability.

Yes, increased sales volume can help you improve vendor discounts and therefore, gross margins. But that doesn’t mean your organization can manage the extra activity well enough to convert discounts to the bottom line. One of the rudest awakenings an owner can have is when projected sales growth is achieved, but profit is no better, or perhaps worse, than a period of lower sales. Remember Blasingame’s Growth Razor: “It’s not what you make, it’s what you keep.”

Fallacy 3. Profitability improves when every customer is yours.

Being the market leader is overrated. Peter cites research showing only 29% of market leaders were also profit leaders. Not only are you not going to sell every customer, you don’t want every customer. Many customers, and some customer profiles, aren’t profitable. Remember, you don’t spend sales.

Fallacy 4. If you grow, customers will benefit.

Peter says focusing on growth is focusing on yourself. Every minute your company focuses on itself is a minute diverted away from focusing on the customer. One of the classic examples of a company’s self-absorbed focus on growth is when it uses the term “fastest growing” in marketing material, as if this benefited customers. What makes you think customers don’t like the size that you are? What makes you think they’ll like your next size?

Don’t get me wrong: I’m the last person to say growth is bad, or that you should be happy with the current size of your company. I’m a capitalist, and capitalists LOVE growth. But I do encourage you to make sure that when you grow, it’s because you’ve thought about why and how. Here are six growth reality checks, each followed by a slap-in-the-face question to ask yourself.

• The marketplace is pretty full already. Is there a real opportunity to grow?

• Growth requires capital. How will I fund the growth I am planning?

• The rewards of growth are typically delayed. Can my organization wait that long for the payoff?

• Growth takes a company into unfamiliar operational territory. Do I have the staff and systems to blaze that trail without creating a casualty list?

• Being a business owner should be a source of happiness. Will I be happy with a larger business?

• Every business has corporate values, good or not so much. If our values are good, can we scale them? If they aren’t, why would we scale them?

Ask the growth questions and answer them as Polonius instructed Laetres in Shakespeare’s Hamlet: “This above all, to thine own self be true.”

Write this on a rock … Just because you can grow your business doesn’t mean you should.




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