There is a wonderful saying in German my mother uses sometimes: Man kann nicht über seinen eigenen Schatten springen.
Directly translated it says one cannot jump over one’s own shadow.
The common English translation is ‘A leopard cannot change his spots.’ But that translation misses almost all of the intent of the original. The German saying reads both like a statement from the world of physics, and a description of something very frustrating. Saying we can’t jump over our own shadows invokes an image of real physical effort. And failure.
That is the world of the owner-scaled business.
Everything must be done but we cannot do it all. We are limited by our experiences, skills, interests and energies, the reach of our arms and 24 hours.
Our own capacity is the shadow we cannot jump over as owners of small businesses. And that is why moving from owner-scaled to enterprise-scaled is the most important thing a small business owner must do.
Scaling, Passive Income, and Exits
We are after the ultimate business here. Not just ultimate in the sense of “the best” (although that too), but in the sense of ‘final’. Almost all small business owners start businesses scaled and proportioned to their own capacities. There is a kind of growing up that must take place: ending that phase and moving on to the next.
The next phase consists of scaling up, passive income, and exits.
Exits and passive income can take many forms. They can range from the actual sale of the business (a complete exit), to inserting a management layer that runs the business. In the later instance the owner benefits from a passive income (‘money while you sleep’) while retaining ownership.
What is Scaling?
Scaling is non-linear growth.
Linear growth is measured as a few percent to 30% or 40% per year. The real fun starts when you cross the line to growth of 50% to 100% or more. This generally cannot be done just by increasing sales. You have to look at moving into new markets, buying competitors, franchising, or other forms of multiplying your presence in the market. That multiplication is scaling.
Why Getting To Enterprise Scale Matters
The sleepless nights, the hours away from families and friends, the risk, the financial investment… the true costs of growing a small business are tremendous. Very few small businesses ever yield a positive return on that investment if they stay at that owner-scaled level. You have to scale, get to passive income, or sell the business for a good price to get back some of what that business owes you and your family.
That return cannot be realized with you on the tools. You cannot jump over that shadow. In that reality the growth in sales and the owner’s investment have a kind of ‘direct cost’ relationship. Sales don’t go up unless the owner expends more effort. The relationship is like a pair of railroad tracks: they run parallel forever.
It takes very little imagination to see that cannot be sustained.
At some point the tracks must pull in opposite directions. The owner’s investment must decrease while the return in the business increases. At some point we have to retire with the other half of the money the business owes us! At some point we have to be able to take time with our families and friends, to travel, to care for our health while the business continues to support us.
All of this is only possible when the business reaches enterprise scale. You cannot jump over your own shadow, but your business can.
How To Leap Over A Shadow
What we can’t do alone, an enterprise can do collectively.
There are four foundational elements that need to be in place to build an enterprise-scale business.
1. A market. There must be clear evidence you have a market for your products or services. There must be evidence you can serve that market profitably.
2. A team. Growing an enterprise cannot be done alone. Following a careful process that takes a different shape in every business, we have to decide how we as owners add the most value to our businesses and delegate every other function. Typically the first layers to shed are administration and sometimes the core business function (e.g. painting houses if you have a house-painting business). Next to go are sales and marketing functions, and finally middle management. You build a team of administrators, makers and doers (painters or bank tellers), sales and marketing people, and finally you build a team of middle managers. This all leaves you to do one thing: lead.
3. A system. The team and its all-important culture cannot function without sustaining and supporting systems. In most small businesses these systems are captured in one thing: the Standard Operating Procedures manual, or SOP. A business without independent management, and an SOP manual cannot function without the daily presence of the owner. A business without those things will also never realize its full value at sale. In fact when I am involved in the purchase of businesses, if there is not an independent management layer and an operating manual, we assess the business generally as unsaleable.
4. Financial health. Growth is impossible without profit and healthy cash flow. It is also impossible with unmanageable debt. The finances of a business must be both healthy and properly documented. The team responsible for the financial management of the business should have a clear picture of where the business is and the financial priorities are for the future.
With these pieces in place we have an opportunity to grow an enterprise with a reach beyond that of our own arms; an enterprise able to generate profit while we sleep (passive income). Ultimately, a business you could sell. We have an opportunity to grow a business that can jump over our own shadow.
At the Great Performances Group we improve the success of small and medium business anywhere in the English-speaking world. Check us out to find out how. Read Clemens’ book “Great Performances – the Small Business Script for the 21st Century.” Leave a comment or question! A Facebook “Like” is sweet too.
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