Does your business model scale

OK. So you started your own business, grew it to the point where you are now making a modest income, and you finally went on a vacation for the first time in five years. Revenue has increased for the past few years, the business is generating a small profit, and you have some excellent employees. Are you ready to take it to the next level and scale your business by a factor of five, ten or twenty?

Before you take out a second mortgage, start talking to venture capitalists and begin hiring like it’s going out of style, take a deep breath, exhale slowly, and ask yourself a few questions.

First of all, what do you mean by “scalable”?

Scalable definitely means different things to different people. At Ground Floor Partners, we work with start-ups and small businesses. Most of our clients would be thrilled to build a $10 – $20 million business in 5 or 10 years. That is very different from most tech startups where the founders hope to grow to a multi-billion dollar valuation within a few years.

For this post, when we say scalable, we are talking about doubling or tripling revenues every two or three years, not every three or four months. This kind of scaling sometimes requires additional capital, but we’re talking angel investors or banks, not venture capitalists and IPOs.

Is your business actually scalable?

First, how large is the market for your products or services? Is it large enough to support your business if you increase your revenue by a factor of five or ten?

Second, what are the most important market trends? Are they positive, negative or something in-between?

Third, do you have a well-understood, replicable business model? (a software subscription, a particular store layout and size, a well-defined set of products and services, etc.) If so, have you demonstrated this by opening up another location or expanding to a new market?

If the answers to all of the above are positive, then your business certainly looks scalable. If some of the answers are not positive, your business may have limited growth potential, or it just might not be ready to scale.

Are you ready to scale your business?

You aren’t ready to scale your business until everything is going smoothly and you are consistently getting more work and/ or customers than you can handle with your current operation. You aren’t ready to scale your business if you can’t get the capital you need to finance at least the first stage of the expansion. And you aren’t ready to scale your business if your current suppliers and business partners cannot handle the increased demand.

Before you go for it, develop a realistic growth strategy and business plan. Take your time and do it right. Don’t assume everything will go smoothly, because it probably won’t.

Do you really want to scale your business?

Never look to scaling as a method of getting out of a bad current situation. It will just make a bad situation worse. Scaling up your business inevitably means more stress, more work, more headaches, and more risk, at least in the short term. If you have ten employees, and they don’t get along now, just imagine what life will be like when you have three times as many people and five times the workload.

The fact is, it is quite possible to grow your business to a modest size (for example “just ten or twenty employees”), deliver a great product or service, and make a good living. Many small business owners eventually “cash out” by selling their business or pass it on to family members or employees. There is absolutely nothing wrong with taking this path. But it is a personal decision, so you need to decide what is right for you, not for someone else.

Common reasons why a small business owner might decide NOT to scale his or her business include:

  • The owner has trouble delegating responsibilities to others
  • The owner enjoys his or her current situation and has no motivation to change
  • The market is extremely small with limited opportunities for expansion
  • Market trends are unfavorable
  • The owner does not have sufficient access to capital, labor, or supplies
  • The market is hyper-competitive with low barriers to entry
  • The owner/founder has an unstable personal life (constantly fighting with his or her spouse, etc.)

What are some of the challenges that come with rapid growth?

The simple answer is that everything that can go wrong probably will:

  • Management conflicts are very common — partners start going at each other because they have different visions or expectations. Or their roles change in unexpected ways, or they go through unexpected life changes such as divorce or death of a family member …
  • Insufficient capital to pay all the rapidly increasing expenses, especially people
  • Underestimating demand, so you lose customers through poor service, slow product/service delivery times, inadequate distribution channels, limited supply, etc.
  • Overestimating demand, so expenses greatly exceed revenues, at least for a period of time. This can quickly lead to poor cash flow, which often leads to a credit squeeze.
  • Processes and operations that worked fine at a small scale often don’t work at a larger scale. Process bottlenecks appear and everything gets gummed up.
  • Supply chain problems can appear out of nowhere — tariffs, trade restrictions, or your top supplier suddenly goes out of business. If your business depends on one critical supplier, and they go out of business, or double their pricing, or stop manufacturing a critical product or component, you can get into trouble very quickly.

If you ultimately decide that scaling up your business is the right move, be sure to develop a solid business plan first. Don’t just fill out a template and make up some numbers.

Take your time and get it right, or as the saying goes, “Measure twice and cut once”.