[5] Busting Out of Mom-And-Pop: A Tale of Three Pizza Shops?

Building a business is a roller coaster journey, full of ups and downs. Most people get into business with a goal of building a huge business, and one that will make them a lot of money. But every business starts small. And while the business is still small, most things can be kept simple. But before long, especially when things are going well, the business will start to 'grow up' and become more complicated. This is usually when the head-scratching starts for the owner, especially with personnel issues and operational procedures. Questions abound about what to do next, who and what are needed to grow, and how to get over the next hump.?

How the business owner responds at these critical inflection points makes all the difference.

I often consider the example of a pizza shop to illustrate this point.

MOM-AND-POP PIZZA SHOP

Consider the mom-and-pop pizza shop. The owner operates one location, usually working with his family members or close friends as staff. Everything is recorded on paper, counted by hand, and operated manually. Everyone works long hours and performs various jobs, from keeping the books to sweeping the floors at the end of the night. It’s a long grind and arduous work. Over many many years, the mom-and-pop owner is able to put food on the table for his family, put a few kids through college, and carve out a decent living for himself. It’s the classic tale of the American dream. But all of the hard work takes its toll. The shop owner becomes tired and weary, unable to scale or grow, while continuing to perform the same menial tasks repeatedly until his body and mind are worn down. Failing to scale, the business is barely more valuable on the day it closes than it was the day it opened. Other than the cash the owner was able to take out along the way, there’s nothing else to show for all those years of hard work. So while it’s commendable to utilize a mom-and-pop enterprise to provide for your family, there is a massive imbalance between the time - and energy, money - invested and the overall return.

REGIONAL PIZZA CHAIN

Now consider the regional pizza chain owner. She operates numerous locations across her region, numbering around a dozen. She learns the undervalued skill of hiring talented people to help her professionalize the business, utilizing software and systems to automate processes. She finds cost savings by purchasing food ingredients at scale for all of her locations at once. She launches ad campaigns covering all of her locations at the same time, benefiting from marketing cost savings. From time to time, she’s able to provide promotions and price discounts in order to compete with other restaurants,? since she has enough volume to sacrifice margin. Meanwhile, her cash flow grows year over year, allowing her to leverage inexpensive debt from banks, pay herself more without sacrificing the business’ balance sheet, and upgrade her personal lifestyle. Not only is she able to put her kids through college, she’s able to send them to elite universities (I acknowledge that this isn’t the path for all kids, but play along with the analogy please) and also introduce them to other prominent business people in the region. She hires general managers for each location and takes weekends off, reading their reports rather than sweeping the floors at the end of the night. Eventually, she’s able to sell her regional pizza chain for many multiples of revenue based on a long track record of positive cash flow and a strong brand known throughout the region.

NATIONAL PIZZA CHAIN

Finally, consider the national pizza chain owner. After building a regional powerhouse, the regional pizza chain owner meets with skillful lawyers and tax advisers who introduce her to the concept of franchising. She has built enough brand recognition with her regional chain such that there are operators vying for the chance to open one of her pizza shop locations in their area, while paying her a fee to use her brand and procedures. She focuses on systemizing the entire business, top to bottom. Her capital requirements and financial history are such that she sets up a public offering for her company’s shares in order to allow a broader base of shareholders to contribute to - and benefit from - the company’s success. She spends her time traveling the country visiting franchisees and giving speeches, and she frequently meets with teams of legal, strategy and finance professionals to find new areas for the company to grow. She works extremely hard but reaps massive rewards, living in a huge mansion in addition to enjoying her multiple vacation homes. Her family is able to go through life without working at all, if they so choose.

While these examples may be overly simplified, this 'three pizza shop' analogy is often helpful for me to explain how to “get over the hump” to small business owners who want to take their business to the next level. Most people get stuck between the local mom-and-pop stage and the regional stage of their business. They don’t do enough to automate their repeatable processes and want to control everything (i.e. they stink at delegating). And, most importantly, they are unwilling to let go of their friends and family as key staff members, which scares away the other talented people who are needed to help the business grow.

If you have a vision for your business that requires it to outgrow you and your personality, the culture and tone must be set at the beginning (or you will have to endure a lot of pain to change it). If you start with a mom-and-pop mentality, you’ll get mom-and-pop results. You need to prepare for the inflection points upfront and run your small business with the mentality of the bigger business owner from the start. You can do this by investing in other people and nailing down all of your repeatable processes.

PS - Software really helps. We are lucky to be building companies in the tech age.

As a personal note, when considering the three pizza shop examples, I quite envy the regional business owner. She is - by and large - independently wealthy, and she enjoys steady cash flow without the headache of running a massive company. She can take time off and explore other things or rest. Ironically, both the mom-and-pop and national franchise business owners are chained to their business, just for different reasons. The regional operator seems to have the better lifestyle, while still enjoying the rewards of financial independence and time freedom. She got over the hump, out of the mom-and-pop phase, and was able to realize a great return on her time and money invested. Well played.