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CEOs

Learn What Top Business Leaders Do to Succeed

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The numbers do not paint a pretty picture for U.S. small businesses. Half of all new small businesses fail within the first five years of existence, while about two thirds fail within 10 years, according to research conducted by Dr. Gary Kunkle on behalf of lower middle market private equity firm Evolution Capital Partners. Among the companies that do survive longer than five years, only one percent experience sustained growth, defined by an increase in employment or capacity.

Kunkle is the founder of Outlier LLC, a consultancy that serves corporate and government clients related to economic research and strategy, and the Research Fellow at Business Dynamics Research Consortium (formerly the Institute for Exceptional Growth Companies) based at the University of Wisconsin–Madison. He conducted research on more than 100,000 U.S.-based, mid-sized businesses.

So how do the top one percent of small businesses achieve sustainable growth while most of their peers shutter? “If you exceed the fuel in the gas tank you will need outside capital or you need to slow down,” says Jeffrey Kadlic, co-founder of Evolution. “It’s better to have singles and doubles than to try to rack up points with home runs.”

According to the report, exceeding the calculated or estimated growth limit threatens a businesses’ stability. According to financial management expert Robert C. Higgins, “If sales expand at any greater rate [than what is sustainable], something in the company’s constellation of financial objective will have to give—usually to the detriment of financial soundness.” Scaling too rapidly presents the risk of being unable to fund the growth and mismanaging operations. Kadlic says he has seen companies triple in size only to collapse because they were undercapitalized and the management team was too thin.

Businesses that experience sustained growth at the right pace are more likely to successfully report the incremental growth process again in the future. Every time a business grows successfully, the likelihood of it growing again increases. As Kunkle puts it: “It’s a modern equivalent of Aesop’s tortoise and hare story: slow and steady wins the race. Incremental advancement, repeated over time, achieves greater results in the long run than a few short bursts. In other words, the more times a company grows, the more likely it is to be in the top one percent of growth.”

Achieving the elusive sustained growth

According to Kunkle’s survey, companies that experienced sustained growth have some commonalities.

1. Learning through repetition. Each time a company expands, it becomes more skilled at surviving the transitions involved with catering to an increased demand for products or services. The first time a business grows, the process is likely to be bumpy. But as a business experiences burst of success over and over again, its owners become more knowledgeable about the process.

“You learn something new every time you grow and you get better at it,” says Kadlic. That said, as the company grows, the growth process will get more complex each time, so a partner such as a private equity firm or consultant can be a helpful resource. Recognizing a need for help is an important step for maintaining upward momentum that is too often jeopardized by business owners’ egos.

2. Practicing transparency. Transparency is a recurring theme among the top one percent of small business owners. Transparency builds trust. Top business owners recognize that being secretive, withholding information, or making decisions behind closed doors is not a likely route to building loyalty.

 

 

3. Tracking and sharing financials. More than 82 percent of survey respondents said that sharing financial information helps a small business grow. It enhances communication between departments, eliminates surprises, and motivates employees to contribute to the bottom line. Carefully tracking earnings and expenditures on a financial dashboard is key to evaluating progress of the business’ growth goals.

Kadlic recommends tracking all of the above information on a financial dashboard. “In business, financial dashboards play a similar role to that of a vehicle’s dashboard—displaying everything from your automobile’s speed and fuel level, to its engine temperature and RPMs. Without this display available, it would be extremely difficult to know how fast you’re traveling, whether your vehicle is in good condition, or if you’re moments away from running out of gasoline,” says Kadlic. “Everything flows from good financial reporting.”

 

4. Identifying goals. The top one percent of small business owners identify goals that are simple, yet specific, in their metrics and time frame. For each goal, top business owners create a clear set of possible outcome that define what the business is going to do and what it’s not going to do to reach its goals. A detailed strategy to attain these goals is also necessary; Kunkle emphasizes that this plan should be transparent and well-communicated to employees.  

5. Promote internally. This may be the toughest aspect of success to get right. Attracting top managerial talent and training future supervisors were identified as two of the top three greatest obstacles for growth among those surveyed. Top business owners focus on hiring entry-level talent who possess the right skills for the position, fit in with the company culture, and have the aptitude and desire to eventually become a supervisor. Promoting internally builds a positive atmosphere by communicating that hard work gets recognized and rewarded. “The focus should be on making sure that the mid-level managers are well trained to onboarding new talent and getting them up to speed,” says Kadlic. “Companies that are growing too fast lose the magic of what worked early on because the leaders are too far removed from the entry level folks. The mid-level managers connect the two.”

 

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