Chapter two of my book “How to Salvage Millions from Your Small Business” discusses this month’s topic. Bigger can be better, but many times it simply isn’t. First, you have to make several decisions:
- Do you really want to be bigger, with the commensurate problems?
- Are you willing to tolerate more mediocrity that will inevitably come from having more employees?
- Can you, and are you willing to hire employees who have the skills that you may not have, like accounting, that will be necessary to get you to the next level?
- Do you have what you deem to be the appropriate mix of personal and business time, and will being bigger affect that mix?
- Will your facility and credit lines (or internally generated capital) accommodate the growth?
Many say that getting bigger will allow greater synergies that will translate into greater sales and profits. Don’t believe it. Although it is possible, it’s elusive at best. Getting bigger at one location is much better than acquiring another facility.
My recycling friends used to ask me how I could manage 6 locations and 140 employees, when they couldn’t seem to keep up with one location. The key, at least for me, was in maintaining good operating metrics and surrounding myself with really good people. If you aren’t currently gathering the metrics and studying monthly financial statements that accurately reflect true monthly income and cash flows, don’t even consider getting any bigger. (Many operators have accountants who don’t know how to treat cost of goods and other special recycling issues to give an accurate period correct income statement.) The same friends said they couldn’t hire 20 good people, much less 140. If you have weak employees, it’s your fault. You either made bad hires, continued to tolerate them, and/or haven’t provided the proper training, structure, discipline, and leadership needed. Start being accountable for weak employees; you are the only one who can change this pattern.
I personally know and consult many small yards, with $50k to $125k in monthly sales, which are making 20+% net profit. On one million in sales, they will make $250,000 this year in profit. They are doing great and don’t want to lose profits by getting bigger. It’s not uncommon to see net margins below 10% in larger operations, even below 5%. But, 5-10% of a big number can be many more dollars that 20% of a small number. You will have to decide if it’s worth it.
A wise friend once told me, “If inventory plays a big role in your business and being bigger doesn’t reduce the inventory cost, there is no incentive to be bigger.” Clearly, there is a time at which this is important, and you reach a point of diminishing return. A lot of factors drive such a point, but really big, like millions per month, could easily be past that point. An operation spending millions per month on inventory is probably paying just as much as the yard buying 40 cars per month; so fifty cents of every dollar earned is spent the same way for each operation. That only leaves 50 cents to carve out a profit and a competitive edge.
The desire to get bigger is endemic to all of us, generally speaking. Boaters have “one footitis”, and recyclers always want later model salvage.
Do what’s right for you; don’t get bigger just for the sake of getting bigger, or because your competitor is bigger. Choose your customer niche, understand your core competencies (Read my prior articles or the book on these topics.), and execute against a well-made plan.
Next month: “Brokered, part blessing or curse?”, tips on building a business plan, and more good stuff from Chapter 2.
Remember, only you can make BUSINESS GREAT!
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Ron Sturgeon is past owner of AAA Small Car World. In 1999, he sold his six Texas locations, with 140 employees, to Greenleaf. He now manages his real estate holdings and investments, and does limited small business consulting. You can learn more about him at WWW.salvagingmillions.com. (Click on “more about Ron Sturgeon”.) He can be reached at 5940 Eden, Haltom City, TX, 76117, or firstname.lastname@example.org.