Business Black Holes

Business black holes, the cycles between them and how to jump your business into greater growth.

The predictable problem of business black holes

Some 20 years ago I interviewed around 700 small businesses to discover whether the growth and stall trends I’d previously been analysing in big business still occurred in the small business market. They certainly did – and they continue to follow the same predictable path today. What’s more, the mathematics underlying all businesses work in the same way across industries, industry sectors and different currencies.

All businesses go through predictable stall points – what we’re calling ‘black holes’ because businesses can disappear into them for many years. In the small businesses market, that delay can be pretty catastrophic. Our understanding of these black holes, and what happens in between, has helped clients see why they get stuck and what to do to jump into far bigger growth.

We’ve also developed our understanding of the four trend cycles that occur between each black hole. Just think, if it takes two years on average to transition a cycle – and there are four cycles between black holes – you’ve just added eight years to growing a business. If you’d understood these cycles earlier you could have moved the business forward faster, or perhaps sold it eight years earlier.

Black hole #1: 80k

The first black hole occurs at 80k, usually when you settle on your first staff member. Given the size of the change, some people decide to stay within the 80k self-employed bracket rather than tip into 80k+ and start building their business. This black hole is the first point at which many businesses end up spiralling round and round.

Black hole #2: 750k

750k is the point at which people have typically built up a business to seven staff, each reporting to the founder. There’s no business leverage without reporting lines, yet this idea often puts the owner into a quandary. ‘I need someone who can sell/manage staff/service clients like me. But I don’t think anyone is else is quite good enough!’

If the ‘someone else’ is good enough, then the owner will have to consider releasing equity. It’s another big structural change and not everyone wants to make it. A business can grow quite nicely year-on-year until it hits 750k – only to spiral round this black hole for several years.

Black hole #3: 17m

At 17m a business is moving from an enterprise to a corporatized company, which is another massive shift. Managers in this size of business might consider creating a board with a non-exec director, and implement structural changes to release the founder from day-to-day management. The business will usually develop corporate-styled systems such as diligence, compliance and governance. It also formalises its processes, procedures and documentation.

At 750k the business couldn’t grow further without setting on more people. Now it can’t get bigger without corporatizing.

Black hole #4: 170m

At 170m the business’s markets will shift from small deals because the only way to reach the big numbers is to go global and/or partner with other corporations.

Everything has to up-scale and by 170m the business is dealing with banks at a very senior level. The business now needs effective supply chains and channels to market. Some people will resist this move and say, ‘Our client base has changed completely in the last 10 years. We used to have a lot of small stuff on the books and now it’s all big deals. I liked it better before.’

Big deals differ significantly from small deals and require a different skill set to move into major corporations or operate on a global stage. Businesses at this size need far more infrastructure investment such as improved technology, enhanced HR provision and so on.

170m is a critical point because there is no turning back from becoming a corporate once you’ve pressed the button. After helping one business grow to 170m the CEO asked us about his new role. We said, ‘You can’t be running the business day-to-day any more because your role is on the global stage. Instead you must let the heads of business lines run their businesses. And remember, you have senior non-exec directors on the board now. If they want to sack you they can.’

We added, ‘But if you get this jump right, the business will hit 220m and continue to fly.’

Black hole #5: 700m

A 700m business is transitioning one of the biggest business chasms because the next important number is 1.2bn. Adding 500m to a 700m business is an immense step requiring major structural changes.

While the CEO of a 300m turnover business is still close to that business, the CEO of a 1.2bn or 3bn business is no longer managing downstream personnel. Instead of the usual CEO-business interaction this CEO will be managing many other CEOs – a different job entirely.

Why do these black holes occur?

Most black holes are due to insufficiencies in the underlying organisational structure, but several other factors also tip a business into a black hole. Businesses neglecting to expand infrastructure and services like accounting and legal, in parallel with their core growth, will soon constrain further progress.

Avoiding black holes requires structural changes – and it’s important to remember that until you’ve completed these changes the increased revenues won’t follow.

The four cycles between the black holes

The same four cycles – points where investment is needed – occur between black holes. Each cycle requires an important, but subtle infrastructure change. To show how these cycles operate, let’s focus on growing a business from 1.5m to 12m.

Sales

The first cycle after each black hole (in this case the black hole at 750k) is always a sales issue.

At 1.5m: all the big deals are probably still coming through the founder, even though a junior sales person may be employed to help. With this limit on capacity the business can’t grow any bigger.

At a conference when I say, ‘It’s now time to put on a salesperson who’s as good as you,’ you can hear the audience gasp loudly. ‘Someone as good as me?’

But even if you can find them, how do you incentivise? What happens if they start earning more than you? Just think…you’ve spent years building the business and now someone is getting more out of it than you!

Channels

The second cycle after the black hole is always a channel issue. For example, how do we get our product to market and how do we service clients?

At 3m: the client base is still probably attached to the owner, which comes back to bite them at this point. Remember when you were still handing your card out saying, ‘If ever you have problem just call me.’ Now the channel problem kicks in because you can’t get any bigger without releasing the client base.

Product

The third cycle is always a product line issue, whether design, architecture or extension.

At 6m: product lines usually start to bite, which is where margin comes into play. One business owner said, ‘When I was smaller I could undercut the bigger guys to win business. But now they’re taking business off me because I’m the guy with the general manager and 23 trucks on the road.’

Size and infrastructure will eventually squeeze your margins because you’re now a middle market – not a small market – player. And middle market players have fewer clients to chase. You’re not a corporate so you won’t win deals because of size and you’re not small enough to win deals on price. Now you’re starting to ask, ‘How do I develop product lines that’ll give me the margins?’

Brand

The fourth cycle is always brand because at this point it’s lagging behind the size of the business.

At 12m: the brand is probably still that of a 750k business. I asked one business, ‘Do you recall when you last did brand, back at 600k or 700k? You went off to a printer, spent a few pounds on business card design and called it your “brand strategy”. Now you’re turning over 12m, but don’t look the part. You’ve built up the product lines, but you need to re-invest in your brand to look like a middle market business.’

These four cycles – points requiring investment – always occur in the same order (sales, channel, product and brand) after a black hole. In the example given here i.e. growing from 1.5m to 12m, the next black hole occurs at a predictable 17m – and the four cycles will all begin again.

How to jump the 750k black hole

750k-1.5m is a significant point for any business – because it’s a predictable black hole. Businesses commonly move from 750k to 1.2m or 1.5m only to fall back over and over. Why? Because they don’t have the right organisational infrastructure to jump the black hole.

A 750K business typically employs around seven people and by 1.5m it’s usually reached 10 or 12 people. Studies show that leaders can have direct relationships with 10 or so people, but beyond that it’s necessary to introduce another layer of management.

And that’s where businesses of this size come unstuck. The owner wants to keep growing their business – but also wants to maintain the relationships they had at the start. Staff also want to retain their personal relationships with the boss because they can tap directly into the energy of a start-up business.

At this point everyone knows what everyone else is doing because the 750k-1.5m business is based on ‘who does what’.

Growing beyond 750k – the problem of a ‘who’ based structure

As the business grows towards 1m, the owner begins to employ more staff to help – perhaps an admin person, then maybe someone for sales, and so on. We call this the ‘who’ model, where named individuals pick up various tasks.

In a meeting someone might ask, ‘What about marketing?’ Everyone shrugs. It seems no one is doing marketing so the owner says, ‘That must be mine.’ Because everyone has a job description except the owner, new tasks readily drift in their direction. Later, someone asks about HR. Again everyone looks blank. So the owner says, ‘That must be mine too.’

Anything not covered by a ‘who’ is left for the owner to pick up whenever there’s a problem. As a result, the business owner becomes totally reactive in desperately trying to keep the various business plates spinning.

As the ‘who’ based business grows, the owner simply adds more individuals for the tasks they can no longer handle. This tactic costs more, yet still doesn’t lead to growth. It also leaves the owner at a loss in terms of what to do to get ‘unstuck’ and move forwards.

Growing beyond 750k – the solution of a ‘what’ based structure

To get through that 750K-1.5m black hole and into the next layer of growth, a business must improve its infrastructure.

First, we need to define all the ‘whats’ – the various business functions. This step ensures every ‘what’ is identified so that nothing is missed. Once identified, the ‘whats’ can be assigned to staff members.

When identifying business functions, we usually find they don’t change significantly as the business grows. Because a functional structure can grow with your business, it becomes a vital foundation for any fast growing business. That’s why functional infrastructure is so important in the Jump methodology when working with our clients.

When a business continues to be ‘who’ based, it’ll keep appointing more people until it runs out of money. But that ad hoc approach fails to address all the necessary functions. Eventually the business spirals back down and can’t grow beyond this point.

Something is missing!

Because the business owner doesn’t have a job description they’ll keep saying, ‘I guess that task must be down to me.’ Being so reactive prevents them developing a fully proactive approach to the business. It’s not surprising that so many business owners become burnt out.

One of my clients ran a business that kept getting pulled back. He eventually said, ‘I have an urgency addiction’, which captured the problem perfectly. He felt important solving every problem because he was the best at it. All those spinning plates kept him busy – and also away from planning.

This situation was stalling the business until we helped him build a better functional structure and jump his business out of the black hole.

Another client had founded a small legal practice. He would take work home – even though he had several small children running about – rather than spin plates in the office. The chaos at home was better than dealing with the office stresses.

Business turnaround

After working with him to improve business functionality he told us, ‘The business is absolutely turned around and has now doubled in size.’

Simply introducing the ‘what’ based structure and work flow systems allowed him time to think, to improve his client analyses and increase profitability. For the first time he could plan effectively and drive the business forwards.

The big move from a ‘who’ to a ‘what’ based structure is the absolute key to bust through the 750k-1.5m black hole.

Delegation

Business owners know intuitively that they need a way to delegate. But how to do it well? We commonly see two approaches: hands off and hands on – neither of which is ideal.

One owner might say they need a marketing manager, for example. They find someone with good experience and typically pay them more than any other employee. ‘You’re an experienced marketing manager – off you go!’ they say to the new employee.

The owner drops everything on this new person and then disappears. Yet in saying, ‘It’s all yours’, the owner still has a set of expectations even though they haven’t voiced them.

Training, giving direction and setting expectations

Three months down the track the owner will ask the marketing manager, ‘Where are my results…and where are all my new clients?’ The marketing manager replies, ‘Well, marketing takes time and I’ve got to build a plan.’ But the owner is disappointed. ‘I thought you were experienced and I need those results now. Don’t you understand?’

This approach isn’t effective delegation and it isn’t very good communication either.

If the owner has been delivering a function themselves, they know exactly how they want it doing. They could explain what they’ve done previously and perhaps suggest working together for a while. This alternative approach would help induct and train a new employee while also setting clear expectations.

At the other extreme lies the micro-managing owner who doesn’t provide enough freedom, responsibility or accountability. As a result, the new employee is likely to move on quickly and all the owner’s recruitment spend is wasted.

Gaining control

For businesses to sustain growth, they must develop effective feedback mechanisms – ways of monitoring and reporting – to complement their new functional structure. Ask yourself, ‘When I’ve given someone the responsibility for a task, how do I know they’re doing it the way I want?

Monitoring and reporting works for every level of functionality. But it’s vital to start thinking about these aspects of bigger businesses early, before introducing your own management structure.

These feedback mechanisms return control to the owner, which is exactly how they felt when they had a direct relationship with their small team of employees.

Adding leadership capabilities to your professional ones

Most business owners started out by being the best at what they do. If it’s an accounting practice they’re an excellent accountant or if it’s a legal practice then they’re an excellent lawyer. But everyone must go beyond their professional capabilities if they’re to grow the business. In particular, they need to be thinking six to 12 months ahead of the business. And to create some head room they must adopt a functional structure.

This change towards a functional structure and feedback systems is the first step in moving beyond your own technical specialism. While an owner will always be intricately involved in their business, their role needs to change with growth.

This is an important time because the management structure change is visible right across the business. But this structural change is often a tough time for everyone and some people might leave because it’s no longer the business they joined. If people do decide to move on, you need to recognise that it’s a normal part of any developing business.

Like the sun

It’s often at this point that business founders come to fully recognise their key leadership role. People have joined the business because they want to follow you. When it comes to setting the business culture, you’re like the sun – the energy source and driver of the culture through your own behaviour.

The future success of the business is totally dependent on how you manage this structural transition because your behaviour is so influential. The first functional change lies with you before the rest of the business can follow suit.

Remaining totally reactive to whatever happens in the company will slow growth and tip the business into a predictable black hole.

Consciously introducing a functional structure right from the beginning enables your business to jump this black hole – and makes it well prepared to fly into the next phase of growth.