George has owned a small machine shop for about twenty years. He’s very good at what he does. He delivers precision parts at good prices on time. He is so good that his customers are always pushing him to expand his capacity. You see, George has maintained his on-time delivery reputation by having the audacity (and the discipline) to turn down work he knows he can’t deliver on time.
Five years ago George had eight employees. The business consisted of a bookkeeper, an estimator, a production supervisor, and five machine operators. George took home $90,000 a year and paid cash for each new machine. He owned the building free and clear. He had no bank debt.
The pressure for expansion mounted. Several of his most reliable customers indicated they might move all of their business elsewhere if George didn’t give them more production time. What is a businessman to do?
You guessed it. He went for the pot of gold. In order to expand, he needed more space, more equipment, and more machine operators. With the additional people, he needed more supervisors. He then needed more clerical help to handle the paperwork. As he worked his way toward fifteen people, he felt he could no longer handle all the executive tasks in front of him and still do the selling. So he hired a salesman.
Five years later, he was making $90,000 a year, had $350,000 in bank debt, and was in the position of having to renegotiate the lease on the added space. His landlord wanted a 20 percent increase. To add insult to injury, his customers were still bugging him to expand.
His decision was to close the second facility, sell off the excess equipment to pay off the debt, and reduce his staff to the more controllable eight.
It is certainly possible that this situation could have turned out differently. He could have doubled his income. He might have taken the bait a second time and further increased his operation. Possibly the additional increase would have given him the additional income, wealth, and stability that would have made the extra headaches worth it. Maybe not.
Many small companies have opened second locations, expanded territories, added production capability, or torn out walls to increase their operations and have, in turn, been greatly rewarded for their effort. But my observation of small businesses leads me to believe that many successful owners who’ve tried to expand beyond ten employees have either failed at the larger size, or later down- sized the company to a more manageable (and often more profitable) level.
Running a business with more than ten employees is really quite a different kettle of fish than running a firm employing fewer. There are skills required of the owner that aren’t required at the smaller levels. Swings in the economy may take a heavier toll on the larger enterprise. Growth usually requires new capital. Unless the growth is deliberate enough that additional cash can always be internally generated, new capital has to come from outside sources. This will either reduce equity or result in interest expense.
One trap associated with increasing a company’s size is that your attention will be further subdivided. For example, you may have been able to focus on the quality of the printing your print shop was producing when there were only five employees in one location. You may find you’re no longer able to do so when you’re jockeying back and forth between two locations. Your new focusmay be to ensure that the managers aren’t ripping you off when you are at the other location.
Each increase in volume generally brings with it an increase in leadership time required. This vacuum will have to be filled either by your giving additional time to your business or by hiring someone with the experience and expertise to fill the void. Such a person will come with a substantial income requirement.
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