When Getting Smaller Is Smarter

You spent years getting the company to this size, and the last thing you want is to dismantle what you worked so hard to build. But things have changed.

I recently led a workshop for a group of entrepreneurs and talked about the different stages businesses go through. I used the analogy of driving a stick shift. In the early days, you’re in first gear, doing almost everything yourself and just trying to get the business moving. As things start working, you move through the gears. You hire people, build systems, create more repeatability, and eventually build a company that becomes less dependent on you.

One entrepreneur in the group stopped me and asked a question that has stuck with me. His business had grown and matured, and he felt like he had made it to what I was calling third gear. But now the environment around him was changing. Tariffs, geopolitical uncertainty, and changes in his market were pressuring some of the assumptions he had built the business around. I don’t know the specifics of what was happening inside his company, but I understood his question immediately: Is it okay to go back to second gear?

The more I thought about his question, the more I realized how hard that can be for entrepreneurs to accept. Think about a company that has spent years importing a key component from overseas. The model works, demand grows, and margins are healthy, so the entrepreneur does what most of us would do. He hires people, adds warehouse space, invests in systems, carries more inventory, and builds the infrastructure to support a bigger company. None of those decisions is a mistake. They are exactly what growth required at the time.

Then tariffs change, and that key component suddenly costs 30 percent more. Shipping disruptions may also occur, or uncertainty may rise about whether another tariff increase is coming. Customers will absorb some of the increase, but not all of it. Margins start getting squeezed, orders slow down, and the cost structure that made perfect sense two years ago no longer fits the business today.

This is where things get difficult. You have people you don’t want to let go. You signed a lease on warehouse space you thought you would need. You have inventory commitments and systems you spent a lot of money building. Maybe you borrowed money to support some of that growth. More importantly, you spent years getting the company to this size, and the last thing you want is to dismantle what you worked so hard to build.

So you wait. You tell yourself the tariffs might change, customers might adjust to the new pricing, or volume might come back. You could borrow some money to get through the disruption. There is nothing inherently wrong with any of those decisions if you believe the underlying business is still sound. The danger is when you make the decision because you can’t bring yourself to accept that the business might need to be smaller for a while.

What if you downshift instead? You cut some overhead, make some tough decisions with people, carry less inventory, put expansion plans on hold, or walk away from customers whose business no longer makes sense with the new margins. You could go from $20 million to $15 million in revenue while you find new suppliers, adjust pricing, and figure out the new economics of the business.

On the spreadsheet, this doesn’t look great. Revenue is down. Headcount is down. You might have less warehouse space and fewer customers. By every traditional measure of growth, you have gone backward. And yet, instead of trying desperately to remain a $20 million company, which would have burned through cash and piled up debt, you are now a $15 million company that is profitable, has cash in the bank, and has the flexibility to respond to whatever happens next. Which one is really the stronger business?

We struggle with this because we attach so much emotion to growth. We celebrate revenue milestones and employee counts. We make the Inc. 5000 and tell everybody about it. We announce new offices, new divisions, and new hires. Nobody gets excited about announcing that the company just made a deliberate decision to get 25 percent smaller.

I’ve experienced versions of this at MultiFunding. There have been periods when we grew quickly, and everything seemed to be clicking. And there have been other periods when the market changed, and revenue dropped. At one point, our revenue fell about 35 percent. We had built a business for one level of activity and suddenly found ourselves operating at another. We had to make changes, and some of them were painful.

Looking back, the hardest part wasn’t figuring out what needed to happen. Often, the numbers told me exactly what needed to happen. The harder part was accepting it. If you’ve built a team of 50 people, going back to 40 feels like failure. If you’ve built a $20 million business, becoming a $15 million business feels like you’ve lost something. If you’ve spent two years building a new division, shutting it down is like admitting those two years were wasted.

Those emotions are understandable. They can also be expensive. We keep people we can’t afford, continue investing in things that aren’t working, or borrow money to support a cost structure designed for a level of revenue that isn’t there anymore. We convince ourselves that we just need another quarter and things will come back. Or maybe just one more. And sometimes things do come back. More often we just dig the hole deeper.

This is why I keep coming back to the stick-shift analogy. If you’re driving in fourth gear and suddenly hit traffic, you don’t stay in fourth because you’re proud that you made it there. You slow down and put the car in the gear that fits the driving conditions.

There is also a big difference between choosing to downshift while you still have choices and waiting until the business forces you to shift. Markets change, customers change, technology changes, costs increase, and something that worked incredibly well for years can stop working. Adjusting to that reality isn’t failure. It’s management.

The entrepreneur in my workshop was asking whether it’s okay to step back from third gear to second. But his question was bigger than that. If I’ve built my company to a certain point and circumstances force me to make it smaller, does that mean I’m going backward?

I don’t think it does. The goal isn’t to protect the biggest version of your company. The goal is to protect the business. And sometimes a smaller business is a stronger business.