The Small Business Pitfalls: Why most businesses grow, but they can never scale

Executive Summary

• Distinguishing Growth and Scale: The article underscores the nuanced difference between business growth and scale, emphasizing the need for distinct strategies to achieve each.
• Common Pitfalls: Identifies four key pitfalls hindering small businesses from scaling, including a lack of focus on building a scalable business model, insufficient emphasis on being people-obsessed, failure to inspire followers, and a deficit in thinking in multiples.
• Scalable Business Model Characteristics: Outlines essential characteristics of a scalable business model, such as rapid revenue growth, efficient internal processes, breakthrough capacity limitations, duplicatable models, and reduced dependence on the owner's day-to-day involvement.
• People-Centric Approach: Advocates for a people-centric approach, asserting that in a scaling business, the owner must shift focus from product or service to building a high-performing team that becomes the face of the company.
• Business Owner Math: Encourages business owners to adopt a mindset of thinking in multiples, challenging conventional thinking, and creating disruptive models that attract future buyers and investors.
• Change Management: Stresses the importance of effective change management, urging owners to make data-based organizational changes with transparency, clarity, and confidence to accelerate business scale.

Full Article

I've been fortunate to have worked with many owners of businesses of varying size across multiple industries for nearly two decades. This is a special group of people; visionaries, ambitious, highly-skilled, and so much more. Entrepreneurs are game-changers and market-disrupters. The backbone of the economy and the heart of most communities. Though you may not be able to pick them out from a crowd of people collectively, there are a lot of similarities between business owners.

One of those similarities is their desire to be the best in what they do. In fact, most are. Whether that be personal drive, pride, or a combination of both, business owners often don't want to be in second place and rightfully so. At some point in successful business ownership, there is a thought to 3x, 5x, 10x, or even 50x the business. In the most simple form, this is generally referred to as scaling a business.

I rarely talk with owners who want to coast by and produce the same results year after year. I'll often ask business owners the question "what does your business look like 5-years from now?" and I'll always get a response that's something bigger, better, and often appears out of reach in the business's current state. These are perfect responses from entrepreneurs because they are entrepreneurs!

The unfortunate reality is that most business owners who have a desire to scale will actually never scale. I describe this as The Small Business Pitfalls and it's why most businesses grow, but they can never scale.

Before we dig in further, it's important to understand the difference between business growth and business scale. While it appears that these two terms can be interchangeable, that is definitely not the case.

Why? Because the way to build a growth business is very different than the way to build a scalable business. The differences might appear subtle at the surface, but far from the truth.

I often break businesses into four different types, or phases, to highlight the primary difference. It's important for business owners to know which type of business they are building and why. There is no right or wrong answer, as long as it aligns with the goals for the business owner and business.

1. Business Structure - the business fundamentals that support a long-term and healthy business model
2. Business Growth - predictable year-over-year organic growth (primarily revenue and team headcount)
3. Business Scale - a transferrable asset that's build via a scalable business model
4. Business Value - a business that's attractive to a sophisticated and strategic buyer

While business owner's generally want to build a business to scale, they often are working a plan to grow.

What's a scalable business model?

There are many definitions out there from various companies and educational institutes, but a scalable business model can be summaries as (but not limited to):

• Revenue increases outpace expense increases
• Internal processes and / or automations accelerate and compound growth
• Breakthrough current capacity limitations and maximize efficiencies
• Able to duplicate business model in different markets
• Business model doesn't break at different revenue levels
• Business can grow and scale without the business owner's day-to-day input

If building a scalable business model is the intent for your business, then avoiding The Small Business Pitfalls is essential. Through thousands of hours of working alongside business owners in this exact context, I've found that there are four common themes that separate business growth and business scale models. To effectively build a scalable business model:

1. Business owners must be people obsessed. Like OCD-obsessed.
2. Business owners must inspire followers. Empowering and gaining buy-in.
3. Business owners must think in multiples. Build to scale and follow the plan.
4. Business owners must manage change. What got you here, won't get you there.

Let's break The Small Business Pitfalls down further and understand what you need to stay focused on while building a scalable business model.

People Obsessed

Building the right team of highly-talented and self-motivated employees is absolutely the number one way to ignite scale in a business. In small business, there is a tendency for owners and their key employees to be hyper-focused on the product or service that they offer. At surface level, that seems okay and often why the business is performing so well. But what got you here, won't get you there. With nearly all energy focused on more sales and revenue, at some point there is a plateau in growth. The business now has predicable sales, but is capped on scaling. They cannot turn on the marketing engine because they do not have the right people on the team to support scaling.

Owners must become people obsessed. To transition from a growth business to a scale business, owner's must delegate the execution of their product or service to the team and turn their energy to the team - a great team. Finding top talent for future roles in the organizational chart, getting the right employees in the right roles, getting the wrong people out of the company, training, retraining, cross-training, temporary assignments in different departments in the company to build more skill and knowledge, building a performance culture, creating a company culture not dependent on the owner, eliminating roadblocks for the team, challenging the status quo, and so on.

In a scaling business, the owner is not the brand. The team is. This is important to understand. The team is everything; the face of the company to customers, vendors, suppliers, partners, the community, new hires, and each other. The owner must always be leveling up and looking at the business from an outsider's perspective. When building a company to scale, there is a likelihood of a sale, merger, joint venture, acquisition, or taking on investors. In these exit scenarios, those interested in your business are equally interested in human capital as they are in your product or service.

The model to scale will break, unless the owner has the mindset to win with people. Just like the owner wants their business to be number one in their industry or market, he or she has to be equally committed to being number one with the people on the team. Every business is competing for top talent. People are everything in business. You must be people obsessed. You must be top-talent obsessed. You must recognize that the best businesses in the world have the best people. And you must be actively pursuing this initiative.

Inspire Followers

The second major pitfall in business scale is leadership, specifically the ability to inspire followers. Years ago, you had this crazy idea to start and grow a business. Your team size was manageable and you had a direct relationship with all or most employees within the company. Most business owners get into business because they have an idea, a unique skillset, or enjoy the work. While these people exist, most business owners do not get into business to build and sell a business that they do not have a passion in. In most cases, people get into business because they like what they do and surround themselves with likeminded people. When it's time to scale, that all changes.

This is no longer about you and your general interests. This is about inspiring and empowering others to take your company to new heights; maybe places you never envisioned for yourself! You're starting to build a team with people in different departments with different skillsets, interests, and personal goals. Your business is getting big enough where you have to dedicate time outside of the product or service you offer to your customers and start building your internal systems and processes. You might be building departments in your company where you have no experience. Early stages of scaling a business can be challenging!

Most business owners in these situations hit a plateau because they lack a real vision for the business. They are now focused on all these other parts of the business, but can't see the forest through the trees. Owners often are unclear in the direction or vision due to not knowing the direction themselves, not communicating the direction to the team, or not knowing how to achieve the desired outcome because there is not a detailed plan.

In talking with thousands of business owners about their vision, I often hear things like "I want to hit $30MM in revenue", "I want to hire a key leader, to separate myself from the day-to-day of the business", "I have no end in sight, I want to grow as big as possible", or "I have no idea what my vision is for the business".

How will anyone follow you on this crazy journey you created for yourself if you do not have a clear vision or the ability to inspire people to follow you to the ends of the earth? Nearly all employees you hire will never be as excited or as motivated about your business as you. Most people are followers. Most followers, especially the ones you want on your team, want to follow an outstanding leader. That outstanding leader is you.

The most effective leaders are inspiring. They can cast a crazy vision to their team, but have the ability to keep the message simple, achievable, motivating, and actionable.

Leaders can inspire followers in many ways, but investing in your team is extremely important. As you scale, you need the right people in the right roles. Having a succession plan for all employees, tailored training and development plans for all employees, and being an employee development focused company will dramatically support the efforts of scaling your business.

Similar to being people obsessed, owners must be obsessed with inspiring followers; hyper-focused on a consistent and clear message that the team can rally behind. If you want to hit $30MM in revenue in 3-years, what is the message your team can rally behind? The message has to be relatable to all employees. The owner and leadership team must be aligned in this message and related as many conversations back to this message as possible.

Breaking this up into three focus areas for the team is the easiest way to do this:

• Impact - describe the impact the company will make in the industry / market you serve by achieving your revenue goal.
• Talent - describe the career opportunities available by working at your company that will impact your employees and their families.
• Client - describe the experience you want to deliver to your clients and explain why that's important.

Be the leader with a clear vision with a relatable and consistent message for the team, demanding nothing less than collectively pursuing that goal.

Think in Multiples

Business owners often think in terms of addition and subtraction, but need to be thinking in terms of multiples and division! Let's call this Business Owner Math. Even if business owners have ambitious goals, when it comes to building a business model to achieve those goals, they often fall short. This is because they are not thinking in terms of Business Owner Math.

For example, an owner may be thinking that they need to hire another sales representative in their company to grow next year's revenue. By doing this, they will grow revenue, fill capacity for their team, and increase their profitability. The math of adding and subtracting checks out! If this new hire works out and hits their goals, we'll look at hiring another sales representative months down the road and start the process again. That's great, but that's a growth-minded business owner and this model brings substantial risks if you're actually trying to scale your business.

Now think in terms of a scale-minded business owner. What if we think about building a scale-plan, raising some capital, hiring multiple sales representatives at once, create some competition, anticipate a couple of the new hires working out, 3x our original plan's revenue, build a sustainable model to hire more sales representatives to scale, tie compensation to sales targets and metrics, and rethink how we'll effectively produce that revenue to enhance our gross margin.

Thinking in multiples comes down to thinking bigger, challenging your status quo, and building something that can actually disrupt the market that will be attractive to future buyers and investors. Think about this example; what's more attractive to a buyer and investor? Clearly a company that has figured out how to build a sales team engine within their business model.

While this is just one example, there are hundreds of ways structure your business model to scale. In fact, all parts of your business have scale capabilities.

At Cultivate Advisors , our methodology is financially centered and holistic-focused; with sales and marketing being the growth side of the business and leadership and recruiting being the capacity side of the business. Productivity encompasses the entire business to ensure efficiency and scale. With this methodology, you can start to think through all parts of your business and the different opportunities to scale.

Generally unintentional, but owners tend to get trapped in the day-to-day of their business and rarely have the discipline and intentionality to pull themselves out of the business and look at the business from a buyer or investor's perspective. This is called working on the business and it's this energy that creates business value and exit-readiness.

Manage Change

Your ability to remove emotion in making data-based organizational changes and effectively rolling these changes out to your team will accelerate scale. Change is hard on people; everyone has an opinion, but when it comes down to actually making a change, that's difficult on people.

I often see business owners struggling with making change themselves. The most common reason is because they are viewing how that change will impact the current business model, not the future model. As a business grows and scales, some things may break, some parts of the business might not actually be scalable, or to actually get to the size of business you want to be, sometimes a different structure or model needs to be implemented. Change must be calculated and planned, so you can delver your vision with confidence.

Managing change within an organization is a critical skill that business owners need to scale their business. As your business grows, so does your team size. This means you have more opinions and more people who you need to help through organizational change. This may mean you're now managing change through multiple layers of leadership. Direct and indirect change management.

To effectively manage change within your business, below are four important pieces to communicate to your team:

1. Alignment on the vision of the company with transparency
2. A clear explanation of why the change is important to achieve the company vision
3. An overview of how the change will impact the individual employee (within their role / department, compensation, day-to-day, etc.)
4. Share confidence and a timeline in what the support and training will look like before, during, and after the change.

What got us here, won't always get us there. As a business scales, parts of the business may need to change. As an owner, you need to recognize this, be willing to change yourself, and bring both confidence and clarity to your team to effectively manage change in your business.

The Small Business Pitfalls Summary

This article is written to help illustrate the difference between a growth business model and a scale business model. There are four key areas most business owners are missing when building their business to scale, that's limiting their ability to achieve substantial and life-changing results. Being people obsessed, able to inspire followers, having a mindset to think in multiples, and leading people via manage change are critical to scale a small business.

Pause and think about these four pitfalls one more time. What separates a growth business from a business that's scaling can be summed up by people, leadership, strategy, and change.

Related Podcast

Cultivate Advisor's CEO Casey Clark and I talked about #Peopleandculture in the #CatapultYourBusiness podcast. Shout out to Casey and Cultivate Advisors for taking time to slow down and talk about the importance #People in business.

Where to go from here?

First and foremost, having a 5-year proforma and roadmap specific to scaling your business, that's absolutely needed. Getting an outsider's perspective on your business model or working alongside a business advisor to break down your business and create a roadmap to scale is a great next step.

If you're interested in talking with someone about scaling your business, reach out to me directly at [email protected] .

Who is Cultivate Advisors?

Cultivate Advisors is a team of entrepreneurs and business advisors, also known as value accelerators. As value accelerators, we work alongside business owners who are in growth-mode and help them to become exit-ready by navigating the complex landscape of entrepreneurship and scale, offering a custom suite of services designed to improve business health, enhance market value, and ensure a prosperous future.

Cultivate Advisors has earned a spot on the INC 5000 for 5-consecutive years as one of America's fastest growing privately held companies, awarded INC's Top Workplaces in 2023, holds World Class Net Promotor Scores, and have over 450 5-Star Google Reviews from our current and past clients.

We believe in A World Made Better By Entrepreneurs and focus on Propelling Business Beyond Expectations.

About Matt Fox

Matt Fox is a Senior Business Advisor with Cultivate Advisors. Starting his first franchise at the age of 19, Matt has nearly two decades of successful business experience. Matt's business experience ranges from small business to corporate; specializing in business financials and leadership. Matt brings an analytical skillset and creative mindset to the business owners he works with. Matt built his first team to twelve employees in one year and later in his career lead a muti-state team of over 1,000 employees. Matt lead large capital budgets to support new growth and acquisitions. Matt's diverse business background allows him to support business owners interested in scaling their own business. Connect with Matt Fox on LinkedIn.