By Jeff Harkness
The phone is ringing more, economic outlooks have improved and more jobs are closing. It’s time to double your business, increase staff and purchase that additional bucket truck. Right? Not so fast!
Successful business growth requires leadership, a sound financial strategy, staff capacity and smart market timing. Growth while rewarding, can also be stressful, frustrating and run companies straight out of business. Simply put, here is a blueprint for success and how to avoid the growth pitfalls.
1. LEADERSHIP AND PEOPLE:
Leadership is defined as “a process of social influence in which one person can enlist the aid and support of others in the accomplishment of a common task”. Studies of leadership have produced theories stating leaders must have traits such as vision, charisma, intelligence and core values. So how do you stack up? If you want to succeed in strategically growing your company you need people to follow you. It’s hard enough to find help and to compete, but if you don’t invest in making yourself a better leader growth will consume and kill you. Focus on these key points to begin your transformation.
A. Know your strengths and weaknesses: Effective leaders invest in their strengths and then surround themselves with the right people to maximize their team in areas where they are weak. The question is how? Start by taking one of the many personality profiles tests. Myers-Briggs, DISC, or Wonderlic all are effective. Strengths, weaknesses, motivations, work habits and insights for your improvement are produced in these reports. Don’t surround yourself with people just like you. I know it’s easy to like them (Of course they remind you of yourself) but it’s a mistake plain and simple. Check your big ego and bring in some people who are different but compliment you. Watch what happens to your culture.
B. Manage pessimistic thinking: Focus your time and energy in areas that impact your business. Sales, hour’s management, people management and productive scheduling are a must. Every hour of your day needs to be efficient. Good leaders can compartmentalize things. Work a weekly plan with clear focus. You won’t have time to get emotional on issues if you are focused on daily tasks. Remember successful leaders create a positive and inspiring workplace culture. You can’t do this if you’re negative and stressed all the time.
C. Engage your people and provide feedback: Consistent regular meetings with a prepared agenda have to be a priority. Too many owners think talking on the phone 3-4 times a day to a manager is enough. This is false. You are not too busy. Schedule time with your leaders and make it a priority. Mix in coffee or lunch. Show people you care. Your people need direction and feedback. The cardinal sin is to say to one’s self “I’m paying them a lot of money. They should know how to do that.” What they really need is your leadership and direction.
D. Clearly define metrics and reward success: Leaders must communicate their specific goals and expectations. Management must be held accountable and actual results compared to budget should be reviewed regularly. When the team meets or exceeds expectations recognize the win! Too many companies don’t keep score or don’t manage the right metrics.
E. Invest in relationships: Leaders expand their companies by investing time, money and emotions in mutually beneficial relationships. Associating with the right customers, employees and centers of influence involves planning, passion, trust and a genuine belief that time will bear results. This is a 24/7 passion, not a nine to five gig a few days a month.
2. YOUR FINANCIAL STRATEGY
Prior to adding on your next million dollar growth venture, you need to benchmark where your company stands with its’ financial requirements. This includes current and future cash flow needs, debt service requirements of your balance sheet, future capital expenditures needs, and a solid sales plan. You have to know realistically what you can AFFORD to do. That means quantifying it to the penny. Examine the following:
A. Calculate your net profit requirements by month. Forecast out 2 years min. This is a bottom up approach focused on your balance sheet obligations. How much net profit do you need to cover the following items?
- Principle payments on existing Debt
- Timing and Principle payments on New Purchase requirements
- Purchases for Growth
- Purchases to update Fleet and Equipment due to age
- Owner Draws or Distributions
- Cash for growth or Working Capital
B. Budget your P&L items including General Administrative costs, Sales and Marketing, Equipment and Fleet costs, Indirect Expenses and Costs of Goods.
C. Review your existing revenue contracts (if any) and close the revenue gap with New Sales targets. Model the timing of producing the new sales and their collection time period.
D. Finalize your cash flow model which combines the above stated items with the timing of collections and payable needs. This becomes your roadmap on an executed plan or the wake call that you need to prevent from going off a cliff!
3. MARKET TIMING
Smart business owners work on being “students” of their trade or industry craft, but often don’t invest enough time and effort into Economic and Government policy trends. To avoid running yourself out of business with bad timing of a rollout strategy, I suggest you do some homework and get educated on trends in the following area.
- GDP, Unemployment and Inflation Trends
- Interest rate trends
- Housing Starts
- Consumer spending trends
- Stock Market trends
- Public Policy and Election
A great way to get yourself up to speed is to talk to your banker and other advisors. You should also attend an Economic outlook breakfast (Most banks do these annually) or be getting an economic update publication at least semi- annually.
4: WHAT’S YOUR END GAME?
Building profits and increasing the value of your company in the current environment is a must.
You don’t just want a paycheck as part of your growth strategy, you want financial freedom options. This is an essential part of any good growth strategy and should go hand and hand with an owner’s desire to make more annual pay. Tree Care companies are marketable. You need to be versed here and understand how one’s “growth plan” impacts future exit options.
The goal is to make money, not a year or two ago but now. Earnings, not revenue, are the biggest driver behind valuation. Look at your “LTM” (Last Twelve Months) of performance and “recast” or “adjust” the net income to normalize costs or reflect owner add-backs. While profits are recovering due to economic growth and leaner management, some firms are underperforming. 18% – 25% adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) is your target range. Examine your value drivers and value detractors and get a professional to update your valuation each 12 month period on a rolling basis.
Impact of the Balance Sheet
A strong or weak balance sheet can impact your total purchase price consideration While each deal is unique, please understand retained assets or liabilities can be negotiated just like your multiple or adjusted EBITDA. Cash, timing of a closing date, working capital requirements, or the pay-off of long-term/ short term debt all contribute to your net purchase price. Coordinate your Growth Strategy with this piece.
Most deals in the green industry typically involve purchasing assets rather than stock. Liability risk and tax treatment usually drive the deal structure. “S” Corporations or LLC’s have more favorable tax treatment when assets and goodwill being sold, but “C” corporation shareholders can minimize the “double tax” impact of an asset deal through careful negotiating and the use of personal goodwill. Get it right! It’s not what you make, but what you keep! Be smart and creative!
The bottom line with a growth strategy is there are a lot of working parts. You need a plan. It requires leadership and qualitative metrics. You need to be precise with the integration of that plan and your plan will have to have some flexibility with contingencies. Follow the suggestions above and you will greatly decrease your chances of death. Remember growth can be a silent killer. Let’s beat it!