By Evan Scott
Since founding ESGI, I have had the opportunity to work with literally hundreds of successful small businesses. For the majority of those small businesses, a unique product or service, visionary leadership or just plain old good luck (or a combination of any of those) is an almost-guaranteed strategy for growth.
Up to a point.
I have watched successful companies maintain year-over-year growth for three, five, even ten consecutive years, then suddenly stumble and find they are unable to sustain their rate of growth. So I began to informally analyze the characteristics common to the companies that stumbled, and what I found surprised me. The common variable in 90+ percent of those cases was reaching annual revenue in the range of $25M to $30M.
It seems that growth beyond this mysterious line in the sand becomes less about hard work and persistence and more about dedicated planning, process implementation and acquisition of the right talent. Further, the companies that recognize early they are beginning to stagnate often ask similar questions on the path to reigniting growth:
1. Our ‘foundation’ clients/contracts made this company the success that it is and servicing them is paramount – but what’s the key to identifying and winning vital new business?
In federal contracting there are literally thousands of contract opportunities at any one time, yet the business development function is one with which every company struggles. Early-stage companies have the luxury of a single-minded focus on perfecting their product or service and fortifying the relationship with existing customers. However, to grow beyond your existing footprint in one or two federal agencies it is important to identify potential opportunities that carry a high win probability. This is an art that can only be accomplished by surrounding yourself with proven talent. We were surprised to observe how difficult it was for founders to evaluate and hire the right talent for where they want their business to go. Creating a dedicated gate process to include BD, Capture, Proposals and Pricing is critical. Utilizing firms that specialize in helping you create these functions is imperative. No company is too small to have a world class gate process. A $25M-$30M company should begin laying the foundation to support a $100M enterprise.
2. This leadership team helped me build the company from the ground up, but is it qualified to take on additional responsibilities as we continue to grow?
Replacing people who have been with you from day one is the toughest decision any business owner has to make. But if you’re approaching the $25M-$30M mark and haven’t thought about assembling a professional leadership team and succession planning, now is the time. This should include a chief executive officer, a chief financial officer, chief operating officer, a human relations director and perhaps even in-house legal counsel. Companies, like people, evolve through many stages. When the company is starting out and then grows to $20M or $25M, typically the original leadership team is effective. But when the company begins to think about dedicated marketing, organic growth strategies or acquisitions, it requires different competencies to be successful. Plan and make the tough decisions now. Be sure to hire the right talent for the roles that you need to support your success at the next level. Try to avoid the trap of focusing on one customer without expanding your footprint at other agencies. If your objective is to be a $100M company, hire professionals who have proven success within a $100M company.
3. How do I identify and attract the caliber of talent that will help us get to ‘the next level’?
Utilizing an outside party will broaden your pool of candidates and help you meet higher quality executives. It will also serve you well when it comes down to negotiating compensation and conducting behavioral references. But interviewing talented executives is no guarantee that they will chose you as their next employer. Remember that the most talented executives are not unemployed professionals waiting by the phone; they are corporate assets coveted by potential employers. Be prepared to answer the questions that seasoned executives are likely to ask: What does your company offer the customer that distinguishes you from the competition? What’s your management style? What are the opportunities for equity? The answers to these questions and others will heavily influence a candidate’s decision. In the end, remember that hiring mistakes at this level can be catastrophic for a small company. A retained search firm can help you avoid common pitfalls.
4. Should I offer equity and what is the best way of doing so?
If your company has managed to hire a talented executive team, the next challenge is ensuring they stay with you. Accomplished executives want to know that if they increase the valuation of your company, they will be rewarded should a liquid event occur. Awarding equity can be a very difficult decision for a founder. But remember, you are offering equity on the increased value of the company and not current value that you built. There are many forms of equity that you can offer. Stock can be offered thru profit sharing plans and vest over a number of years, similar to stock options. We suggest that equity not be awarded on day one, but baked into the employment agreement. When certain milestones are met after 12-18 months, the executive will then have the option of receiving shares in your company. We have found that in order to attract highly confident and accomplished executives, you must utilize equity in your company as both an attraction and retention tool.
5. I still feel a strong need to be involved in all or most of the decisions that affect this company – how and what do I delegate?
The biggest obstacle for success beyond the $25M-30M mark is very often the management team. Founders/owners with strong emotional ties to the company they’ve built are far less willing to cut loose underperforming people or product lines and reinvest in stronger ones. When a founder feels the need to be involved in every decision, it stunts a company’s growth and pushes talent away. We have always felt this all comes down to one key element: TRUST. If you hire great people who have the best interest on the company in mind, get out of their way and let them help make your company great.
Evan Scott is the CEO and a founding partner of the executive search firm ESGI. The company is based in Washington, DC and specializes in working with private sector companies that sell products, services or consulting to Federal, State and Local Government. The firm assists these clients with recruiting senior level executives for their key positions. He serves as Chairman for The Membership Committee of The Homeland Security and Business Defense Council, serves on the board of The Washington Chapter-USO and is active at AFCIA, NDIA and Infraguard. For additional information on ESGI, visit www.esgisearch.com.