Sidestep the Most Common Cause of Profit Leaks

(My initial version of this article was originally published on Forbes.)

Do you ever feel that you must address a “difficult” situation in your business, and you don’t?

It is fascinating how often business owners take actions that are detrimental to the profitability of their business.

In some cases, it simply limits profitability and growth. Other times, it can lead to the outright loss of the business.

There is a common pattern at work, especially among highly stressed business owners. Seeing where this pattern is at work can transform the profitability of your business, as it directly creates leaking profits.

In this article, we share a recent example of the high cost of this unconscious dynamic.

Jeanne (not her real name) reached out to us as she sought to exit her insurance agency. She had spent nine years building the agency into a considerable multi-location business. Jeanne was a true entrepreneur. In her early 20s, before the insurance agency, she built a multimillion-dollar multi-level marketing (MLM) company. She later transitioned into insurance, using her work ethic to replicate her success in a “slower-paced” business.

Jeanne revealed she wanted to sell her agency and go back into MLM, even though the lifestyle didn’t align for her. We explored her decision-making process around this counterintuitive change in lifestyle.

Jeanne was drowning in management headaches. No one, except her, produced results of any significant level in her organization. Much like her former MLM business, Jeanne was the rainmaker. Only in this case, she supported a large team of employees on the payroll.

She was fed up with constantly being let down by employees in her organization. Her work had devolved into:

? Holding others accountable

? Setting new goals and initiatives

? Hiring new people

? People leaving

? Seeing the initiatives fail.

She was done. The fascinating part is that we observe certain companies across the globe repeat this pattern ad nauseam. There are cultural differences, yet the pattern holds. It is a human trait.

We find that humans are not biologically wired for business. Successful business leaders must recognize this and navigate themselves around it. To understand this pattern, let's look at some science here.

The brain is made up of several major regions. The most primitive part of the brain is the limbic region. This region senses danger and protects us from being killed. It ensures survival by processing external cues with emotional or motivational relevance. The limbic system then triggers emotions and behavior. These triggers can also be called reactions.

For the narrow point of this article, the value is recognizing the social nature of human beings. Humans are wired for connection in social environments. The limbic portion of the brain is always monitoring for danger. It seeks conformance, fitting in, getting along, being liked and a general lack of conflict. It is much harder to be killed when you are among a group of close friends than out alone in the dark. With this point behind us, let’s shift the focus back to business.

Business owners constantly make decisions that can affect the viability of the business. Oftentimes, these decisions impact employees’ livelihoods. Likewise, choices may be made that support the employees and end up undermining the business. The owner’s unwillingness to make difficult decisions is often rooted in avoidance — avoidance of “interfering” with their personal relationships with the employees. It kills businesses.

In post-mortem analyses of these failures, there are no logical answers. We often find that the owner unconsciously chose a course of action that put the company at risk. They chose not to confront unworkable dynamics with employees or others. The business owners usually acknowledge they were hoping for the best and were trying not to “hurt the relationship” with the employee(s). It is a classic case of the limbic brain preserving connection while undermining performance.

In Jeanne’s case, we determined that she was emotionally attached to many key employees within her organization. The majority of key managers and salespeople were family members. Providing an opportunity for her extended family to reach new levels in their own lives was a primary reason she started the business. It was a noble intention. But in the long run, they were not able to perform at the level she did. And it burned her out.

In the end, Jeanne did some internal work that allowed her to get clear on why she was in business. She decided that she was in business for herself and her future — not the others around her. She also chose to step into a way of being that would create clear performance measurements for all employees, family or not.

Jeanne stepped into being a highly committed leader and held to these new standards. She did it in a way that exhibited her commitment and kindness to the well-being of the employees. Some people left. Most importantly, so did her anxiety, frustration, and desire to walk away and start over.

Jeanne’s profit doubled within six months and has been growing ever since. She now works less than she did before. She now enjoys waking up on Monday morning and growing her future.

The key to stepping out of this situation is doing the work required to view your company from the viewpoint of a professional investor. We call this The Private Equity Perspective. How would an objective, performance and profit-minded fund manager run your business? Comment "Perspective" below and we will send you document to go deeper into the power of this concept.

You can begin by taking the following steps:

1. Evaluate all key relationships in the business.

2. In which relationships do you feel constrained?

3. What actions would lift the constraint?

4. What measurements would eliminate a recurrence of constraint?

5. Why are you in this business?

6. Where might you be exchanging what you truly want?

7. Take decisive action to confront constraints and implement measurements.

Take time to go through the questions above. This is where Jeanne started. Eliminate what is in the way for you through this process. It is one of the quickest ways to stop profit leaking from your business.

P.S. Whenever you’re ready… here are three ways I can help you stop profit leaks and surprises and maximize the value of your company:

1. Take a deeper dive into The Private Equity Perspective? and discover the next steps to create more predictability into owning your business. Just message me "PE Perspective" to receive it.

2. Join Our Implementation Program and be a Case Study: I’m putting together a new case study group inside Boardroom. If you’d like to work with me on minimizing stress and surprises while boosting your bottom line, send me a private message and put “Case Study” in it. I’ll get you more info.

3. Work with me and my team privately: If you’d like to work directly with me and my team to increase your profit margins and ease in your business… just send me a message and put “Private” in the first line. Then, tell me a little about your business and what you’d like to work on together, and I’ll get you all the details.

About The Profitable Leader?

When Dan Smith worked as a Wall Street Private Equity advisor and investor, he employed a very specific process to analyze companies for purchase or investment. He employs the same methodology to analyze and manage companies on Main Street today. Having participated in capital raises and placements into the hundreds of millions, Dan and his investment funds use key processes to accelerate the returns. We call these methods the Private Equity Perspective. We created The Profitable Leader? to partner and share this strategy with select business owners to rapidly expand their profitability.