That’s a Stretch

Let’s talk about your business stretch goals.

As you grow older, you’ll recognize the increasing value of stretching your body. And as you plan to grow your business, you also should be thinking about stretching – as in your goals.

While entrepreneurs are thought of as a freewheeling lot, that isn’t necessarily the case. Sure, there are some big-time risk takers out there, but there are just as many (if not more) business owners who are unsure of their future or are overly cautious.

Let’s start by defining a stretch goal.

Simply put, a stretch goal is a target that might be a bit beyond what’s considered a reasonable expectation. For example, if your business has grown by 5 percent annually and you expect steady growth, 8 percent might be a reasonable stretch.

Experience shows that often those stretch goals become achievable. Sometimes market conditions change. Other times, the value of a product or service that is slow to catch on is suddenly recognized. And often, entrepreneurs are unaware of the many funding options open to them; securing additional funding to bolster inventory, add a sales team, increase product development or multiple other needs may be the missing key to increased success.

Let’s try a brief exercise on stretch goals that looks two years ahead to 2019.

First, what are your stretch goals in terms of revenue and earnings before interest, tax, depreciation and amortization (EBITDA), as well as the numbers for the most recently completed financial year and projections for the current year?

As a reminder, remember that EBITDA measures a company’s operating performance without factoring in tax numbers, accounting issues and financial questions.

From there, describe three things that are hindering your business.

That might entail anything from a weak distribution system to the departure of key management members to a competitor introducing a better product or service to limited inventory. Theoretically, the number of hindrances is unlimited – these are just a handful of examples.

Now, what’s a ballpark figure for the amount of capital infusion you would need to accomplish your goals?

All this information, combined with questions used to judge risk tolerance, will enable a lending expert to pinpoint lending options that are best-suited for you.

Remember, the idea isn’t to push you out of your comfort zone. It’s more to show you that, from an outsider’s perspective, you have a chance to make real gains. And it’s about adding clarity to your business goals while removing doubts you may have harbored about your operations going forward.

To further assuage any doubts, “stretchers” can be classified into a few different categories.

Conservative stretchers may be happy with 5 percent annual growth, while moderate stretchers fall in the 5 to 15 percent range. So-called aggressive stretchers push for 15 to 25 percent annual growth, a rate that will have those entrepreneurs, by necessity, planning and investing ahead of the curve.

And for those striving to top 25 percent – let’s call them “rocket ship” stretchers — prepare for an exhilarating but potentially bumpy ride.

Has this given you the tools you need to clarify your realistic expectations?

Golf and entrepreneurs seem to go together, so think about this: If you’re on the green, you’ll never sink a putt if your shot doesn’t reach the hole. As long as you hit the ball hard enough, it may go past the hole, but at least there’s a chance it goes in.

Similarly, if you never stretch a bit, you may never reach that potential that may not be so far out of grasp.

How Should You Invest Your Next $1,000,000?

Take some chips and focus on testing.

In workshops that I do across the country, I ask participants what they would do with their next $1,000,000 – and how they would split investing it between their business and a mutual fund of their choice.

It’s an important question – because while it’s tempting as entrepreneurs to go “all in” in our businesses, it’s always wise and prudent if you can to take some chips and move them to the side. Trees don’t grow to the sky forever, and despite our businesses being our babies, it is smart to diversify some of the risks.

It’s also important to take the question one level deeper. Let’s say you were to decide to invest $800,000 into your business, and $200,000 into your mutual fund – what should you do with your $800,000?

If you are lucky to have a formula in your business that you know you can make money with, it’s tempting to pour your money into the model, with the hope and intent to “do more of that.”

Putting all your money into “what is working” is also short-term thinking. It’s wise to take some of the chips that you will put into your business, and experiment with speculative and new ideas that will hopefully diversify the model.

Do you have one sales channel that works the best? Do you have one customer that makes up the majority of your sales? Is there one product that is your home run.

We work hard as entrepreneur’s to get to these points. And then when we’re finally there and are making money, we want to keep doing it, and at the same time should be worried about concentration risk. So we need to take some time and money to try new things.

So what would you do with your next $1,000,000? My first suggestion is to take some money and put it on the side and put a good chunk of it in your business. But then go one step further – use the bulk of your money that you are going to put into your business and put it into what is working, and use some of it to try new and experimental ideas.

Is a Family Business or Partnership Right for You?

Here are some tools to help think it through.

What does Harper Lee’s classic novel “To Kill a Mockingbird,” which was turned into an equally stellar film, have to do with business?

It gave us this quote: “You can choose your friends, but you sho’ can’t choose your family.”

And while relatives are the banes of existence for some people, that doesn’t stop many entrepreneurs from starting family-owned businesses–or entering into partnerships with close friends, who can be just as frustrating as relatives.

In my loan advisory firm, we frequently get phone calls about partnerships that have gone awry.

Let’s look at the pros and cons of a business with principals having close ties.

On the plus side, loyalty should be strong and the goals are likely to be similar.

As chron.com noted, “Having a certain level of intimacy among the owners of a business can help bring about familiarity with the company and having family members around provides a built-in support system that should ensure teamwork and solidarity. Other benefits of a family business include long-term stability, trust, loyalty and shared values.”

Don’t forget stability: Family members are far more likely to be there in the long run than outsiders who might bolt the first time a better opportunity presents itself.

In addition, family members are more likely to be flexible. Need to take your child to the doctor or soccer practice? Want to take a long weekend on your anniversary?

Family members are probably going to be more understanding than strangers.

It should be noted that family-owned businesses seem to enjoy extra cachet among customers; the personal touch appeals to customers, suppliers, and circles of influence.

And a family-run business tends to have lower starting costs because participants may well work for free or for little compensation until things get up and running.

Moving to the negative side, just because someone is a relative doesn’t mean they are right for the company. And because they’re family, it will be that much harder to remove them from the job if they prove to be inadequate. Balancing business needs with personal relationships can be tricky.

Meantime, sibling rivalries may rear their ugly heads. And differences regarding succession–what happens when the next generation has radically different ideas or simply isn’t interested in the business –may also wreak havoc both in the business and in your personal life.

Because everyone’s related (or at least the key members are), the corporate structure may well be lacking, which can lead to regulatory issues and poor professionalism. Employees who aren’t part of the family may feel resentful and neglected, especially when nepotism is obvious.

Also consider that a family business may lack proper perspective and alternative viewpoints. If everyone has similar life experiences, they’re also likely to have the same blind spots. Group thinking in this case won’t be helpful.

That leads to this question: What can be done to prevent problems and reduce the risk–there’s no way to completely eliminate it–family businesses and close partnerships pose?

Consider the previously discussed risk tolerance post.

Have each potential partner take the test, then compare answers. This will give you a compatibility gauge in terms of business philosophy.

If you score as “risk flexible,” but brother Tom is “risk neutral” and cousin Joe is “risk averse,” you’re going to clash. Conversely, if your scores are similar, you might expect reasonable good compatibility, which bodes well for your working relationships.

In addition, all partners might want to sit down and write out their stretch goals for the business three years from now, and then compare notes. Granted, it’s a bit premature if your business isn’t underway, but your answers provide another information point for comparing business philosophy.

Plenty of family-owned businesses exist in the world today, and there’s no inherent reason to dismiss the idea out of hand. That said, compatibility may well be the ultimate deciding factor in success, so be sure to consider working relationships before moving forward.

There are pros and cons to staying in a family-run or partner business. Pros: loyalty, trust, stability, familiarity. Cons: incompatibility, old sibling rivalries, divergent goals, dissimilar risk-tolerance levels.

How do you and your partners calibrate?

A Tale of Four Fishpreneurs

Which one do you most relate to and why?

Four friends grew up in a small coastal fishing town.  As they embarked upon their careers, they didn’t forget their roots but tackled the world differently.

One Fisherman stayed in town.  His life didn’t change much.  He took his fishing pole to the waterfront every day and caught a few fish.  He sold them to a store and made a modest living.  He made enough to live a safe and peaceful life.

The second Fisherman started his career in the same manner but grew restless.  So he saved enough money to buy a small boat.   The vessel allowed him to go out into the deeper waters every day, and he caught more fish than if he stayed on shore.  He also lived a relatively simple life, but he was able to live in a slightly bigger home than his first friend.

The third Fisherman wanted more.  And while he started on the same path, he attended a business class and wrote a business plan to secure a loan to buy a fleet of five boats.  He hired employees and had to keep them motivated and paid to keep his boats on the water so that he could make his debt payments.

As the business grew, he needed an office manager to keep track of all of the paperwork.  He had to rent a small yard to store his boats, and manage his fleet.  He liked his life but didn’t enjoy that he spent more time administering, and less time on the water.

The fourth Fisherman couldn’t wait to leave town.  It stifled him.  He came up with an invention for a new type of fishing equipment and ventured north to try and find investors who would back his idea.  It took a long time and was a struggle, but eventually, he found an investor, and then another one.

Slowly they got the product right and started to sell it in stores.  He had a board of directors to worry about and a lot of pressure to keep them happy and make the returns they wanted.  If he can get his invention to take off, even though he now only owns a small part of his company, he will be infinitely richer than his few friends who he left behind.

Once every year, the Fishermen get together and share stories and reminisce.   What do you imagine their conversation is about?  Do you think one is happier than the other?  Which one do you identify with and why?

How Quickly Do You Want to Grow Your Business?

And why it matters.

Close your eyes for a minute, and ask yourself what is your top-line revenue and bottom-line EBITDA goal for your business three years from now. Then jot your numbers on a piece of paper, and compare them to your results over the past twelve months. What are your growth targets by percentage?

The most important thing about this question is that there is genuinely no “right” answer. How much risk you want to take, and how quickly you want to grow and expand is a deeply personal one. But if you can find your “comfort zone” and be content with it, you can plan accordingly and make the financing decisions that are right for you.

If your goal is exponential growth, (let’s say 100 percent or more per year) you should probably seriously consider equity or venture financing. In most instances, these are the financing mechanisms that work the best for hyper growth.

If you are very conservative, and are content with less than 5 percent growth per year, you may well be able to growth through cash flow and don’t have to worry about lenders or investors. Your conservative choices will avoid a myriad of headaches that you don’t need to concern yourself with.

Most entrepreneur’s I know fit somewhere in the middle. They want to move their business up the ladder steadily and with a good rhythm, without risking falling off along the way.

If you’re one of these entrepreneur’s you can likely use debt to grow your business, and you will need it along the way to preserve cash and keep moving forward.

For these companies, a debt plan is very important. You need to pick your capital investments you are going to make each year, and look at long term options to finance them. And you should make sure you have a line of credit in place or possibly an asset based line if you have accounts receivable and or inventory to give your business the fuel it needs to grow. You can also likely avoid investors and retain control of your company.

How quickly do you want to grow your business? If you decide now, you can make the right choices to push you forward. If you don’t decide, or keep changing your mind you might risk falling off the ladder as you go.

Five Dilemmas Entrepreneurs Struggle With

What is your growth dilemma ?

The classic stereotype of an entrepreneur is one who is always running, pushing the envelope and taking risks. This is the “sex appeal” of entrepreneurship that many dream about and aspire to. Yet it’s important to know that at every stage of their journey, entrepreneurs have quiet fears or dilemmas that are holding them back.

Some common dilemmas include:

· You’re just not sure what to do next. You would like to keep moving forward but you’re stuck because you’re not sure what the next best move is.

· You’re so busy in your daily grind and routine that you don’t have time to think about your next move. You’re working in your business instead of on your business.

· Growing requires an investment. You’re not sure if you have the stomach to take on more debt or put in the cash that is required to grow to the next level.

· There is tension between you and your partners about how to grow. You might be the “grower” and they are more conservative.

· You’re “happy with your lot”. Things are going well, and you simply want to enjoy them.

What is your dilemma? Being aware of it might help you overcome it.

 

Growth Slumps

And how to avoid with them.

It’s often been said that building growing and running a business is like running a marathon. And in the marathon, some miles will go faster than others, and some miles will be harder than others. No mile will be the same.

While I have never run a marathon, I suspect that you probably run the first few miles at a faster clip than the next dozen. At some point your body starts to slow down and you get into a rhythm.

I think the same is true for building a business. During the first few years, you’re building up your steam, and putting it all on the line. And then, hopefully, things start to stabilize and you get into a “new normal”. And while you’re happy that you’ve gotten through the first few miles, you don’t have the same urgency or type of energy you have right at the beginning.

At this point, your business will likely stop growing at the same rate as the first few years.

Are you at this point in the journey? Are you happy with how your business is growing? Do you feel like you are starting to slide a bit?

If so, take a pause from the marathon, pull out a piece of paper and ask yourself two questions.

On the one side of the paper answer this question: If the tooth fairy arrived with a million dollars under your pillow in the morning with the condition that you had to invest it in your business, what would you do with the money and what return would you expect from the investment. If you have a strong answer, why aren’t you doing it? And if you don’t have a good answer maybe you need to really invest the time to ask why not?

On the other side of the paper ask yourself the question: what is your stretch goal for your business in three years if all your dreams come true. Then think about what ingredients in your cake you are missing to get there. It might be equipment, sales, a management team, acquisition targets etc. What capital infusion, if any, do you think you need to get there?

Now compare your answers on both sides of the paper.

My hope is that this exercise will get you out of your growth slump, and keep pushing onward.

How Much Money Should You Be Investing in Your Business Today?

There is no simple answer.

The simple rule in business is that you must be willing to invest and take risks to grow, expand, and make money. While the rule might be simple, how you choose to execute against it is a personal choice and there are no right answers.

Sometimes I meet successful entrepreneurs who have built strong and sustainable businesses without taking on any debt or equity along the way. Their rule is simple: you invest as you can afford it. They’re not concerned about competitive pressures or getting bigger faster. It’s one way to go and an admirable path.

On the other extreme are those who choose to ride the venture capital treadmill. In these cases, years or even decades of losses can be acceptable as the company focuses on growth and market share. These entrepreneurs are constantly in fundraising mode. While this path is not for me personally, some of the greatest icons and success stories of our time have chosen this path.

I would argue that 98% of entrepreneurs don’t fall into either of the bookends that I describe above. At different points in their journey, they will rely on equity or debt to spur their growth.

In the early stages of these ventures, I find that entrepreneurs are often stuck on thinking that they need a lot more money than they do to get going. Instead of struggling to try and raise a million dollars to accomplish A, B, and C, they might be much better off raising enough money to get A done, and start to prove their concept and get some cash flow moving.

On the other side of the coin, often later in the life cycle of the company, when ideas and concepts have been proven, there can be a real need and benefit for expansion capital. Yet the entrepreneur either has the no debt badge of honor (they don’t want to take on any more debt), or they’re used to their routine and can’t think out of their box to think about how to expand and grow.

Where do you fit in this paradigm? One way to answer it is to ask yourself the question, “If you were presented with a gift of $1,000,000 and had to invest in either your business or a mutual fund of your choice, how would you divide the gift and what return do you expect from each investment?”

This is the theme of the book I am working on entitled “Your Million Dollar Question”, that will come out later this summer. My hope is that it will help you think through these important issues.

Looking for Some New Insights into Your Business?

Dump the fancy consultants and hire some interns this summer.

Building and evolving a business always requires new insights and new ideas about what’s happening inside and outside your organization. And one of the toughest things to do is to shake out of the daily grind and find new ideas about what we can or should be doing differently. Routines become monotonous, and we go about our business.

Organizations often bring in consultants for as “outsiders perspective”. Sometimes, the consultants have an area of expertise, and other times they simply come in to bring in a different perspective. As experts, they charge by the hour or the project, and bring their prior experiences and biases to the table.

How about trying something new this summer. Dump the consultants and bring in some young interns to bring those ideas to the table. Don’t send the interns on coffee runs or stick them in a cube sorting out papers. Give them hard and challenging projects to work on, and take the time to teach them.

Will the interns learn and benefit a lot? You bet. However, you will too. Often, the best way to learn is to teach. If you take the time to dig into the basics and explain concepts and listen to the questions that the interns ask, you will invariably get new ideas that you have not thought about before.

We have four interns at our small company this summer. They have four very different projects that have been well thought out. At the end of each of their assignments, they will have something tangible to add to their resume, and we will have something we benefit from. We seat them right smack in the middle of the office so they can listen and learn while they work on their projects. And they come to lunch with us every day and we try to take the time to answer their questions. And that is often where we learn.

Want some new insights this summer. Find a smart intern and make their brains hurt. If you do it right, your brain will hurt as well.