In looking at acquisition opportunities over the last eight years, I have seen a number of companies forced to put themselves up for sale because they failed to manage downturns in their businesses properly. Or, they failed to manage their businesses well when sales expectations were not met. It is important for CEOs of fast-growing companies to remember to manage their businesses downward when sales shrink (even if only temporarily), or when revenue opportunities are limited in unexpected ways.
How Does This Happen?
There are many reasons why a fast growing company’s sales can shrink. In my own industry, here are a few examples:
• I looked at a company that lost $4 million in the previous year and was on a course to lose even more when I reviewed their business. Their sales had shrunk from a high of $25 million down to $10 million because the niche they had specialized in had been sent offshore by most of their former clients, and they were simply unable to replace the lost business fast enough to support the human and technical infrastructure they had built for the larger niche business.
• Another business had burned through $6 million of venture capital money in 13 months because they did not anticipate a significant downturn in spending by their target market just as they had finished raising their capital. Instead of scaling down and waiting for the window of opportunity to re-open (and it has), they went into full spending mode and ran out of money before they ever had a chance to execute their plan.
• The saddest example of a big revenue fall was a company that had doubled its sales three years in a row. I originally met the owner of the company at a regional awards ceremony for fast-growing companies (a first stop for a number of future Inc. 500 companies). Unfortunately, in order to maintain that growth, the company decided it could compete with its biggest and most established customer by becoming a dealer for a competitive product (since it already knew how to sell the product) and by taking work from its customer’s biggest competitor in a different vertical. These strategies might have worked, except that the business model for the dealership turned out to be a big money loser and the client’s biggest competitor in the other vertical decided to take its work away when someone with equal experience (who also was not working for a competitor) offered them a lower rate. The net result was that the company went from monthly sales of over $750K down to sales of $65K in less than 13 months and the double-digit profits that were being generated at the beginning of this cycle turned into huge losses by the end of the cycle.
In each case, these companies failed because their CEOs refused to cut expenses as their sales shrunk. These CEOs continued to believe that the sharp revenue drops were only temporary and that a new sale or success strong enough to save the company was just around the corner. They were convinced that if they did little or nothing that their next sale would be large enough to support the people and infrastructure that had been built when they were rapidly growing. In reality, these leaders refused to read their own monthly income statements and take corrective action. This lack of decisive action and disciplined leadership ultimately caused each one of the CEOs to lose their companies.
What Can Be Done?
Each of these CEOs could have saved their companies if they had only been willing to do the difficult task of cutting expenses from the company. While each had done some cutting, none of the CEOs came close to cutting enough to save their companies. In each case, fear of reducing or eliminating the wrong thing or person also played a role in these CEOs inactions. At one of the companies, the CEO was so afraid of cutting the wrong person, he just failed to cut anyone and convinced himself that it was only a matter of time before things got better.
Deciding what needs to be reduced is often the hardest step when necessary cuts include people who helped build the business in the first place. This is particularly true in the call center examples above because salary and benefits are the biggest expense and the easiest savings are generally at the top of the organization. In each of these situations, the companies needed to eliminate lots of people to survive (mostly in management and IT) and in two cases, new owners came in and terminated enough people to keep the companies in business.
Once you decide that people need to be cut, figuring out who these people should be is excruciating. The hardest part of being a “boss” is firing someone. It’s worse when the person being fired has done good work for the company. Despite tenure and performance, maybe their job function is just not needed in a scaled-down company. Or you have two people doing the same work because of the size of the company and while one person is good, the other person is better for a smaller group. One of the hardest days of my business life was when I had to terminate 39 people in one day because the company they worked for had run out of money on the day I acquired the assets, and none of these managers would be needed in the scaled-down company (not a single phone agent was terminated).
Other areas that are often targets for cutting include real estate or facilities and IT. As a company scales back, its need for space scales with it. In each of the situations described above, I remember the sadness of walking into call centers with lots of empty chairs and idle computers. There is no worse reminder of a lack of sales and a lack of success than empty call center seats.
In the IT area, as a company grows, it is often able to get people with specialized skill sets that smaller companies just can’t afford. Often CEOs are afraid to eliminate specialists or attempt to “dumb down” their IT infrastructure despite the obvious fact that the company can’t afford to keep the specialist or the specialized infrastructure. In the first example above, the CEO kept a $1 million per year programming team in place even though the amount of programming needed outside the abandoned niche would never be close to what had been needed for the former customers. In the second example, the company retained a six-person IT team that was immediately scaled down to two people when the company was sold.
The key to successfully managing a company when sales don’t meet expectations is to make decisions quickly and to manage to the “what is” and not to the “what will be.” Also, be prepared to review every expense (whether it is a person or a service) and ask yourself: Is this really needed in a smaller, scaled-down company? Hopefully, none of you reading this will ever have to ask that question.