Economic recession and world events led to the downfall of Brown’s thriving firm.
Kevin Brown remembers the heady days of 1995 all too well. “I had just started my own marketing communications firm,” says Brown, now 40. “A significant portion of the business was coming from dot-com companies [and] we also had some major banks and insurance companies as clients.” Confident about the future growth of his former company, Strategic Marketing Resources, Brown bought land and built an $8 million plant in Alameda, California, near San Francisco and Oakland. “Besides the creative work,” he says, “we wanted to do our own printing and mailing, without outsourcing. That’s what differentiated our company from the competition. We had $6.5 million in annual sales and over 200 employees at the peak [of the business], as well as a state-of-the-art data security system to protect our customers’ privacy.”
Then the tech-stock bubble burst in 2000, dragging down the entire stock market and sending the economy into a recession. And after the 9-11 attacks in 2001 came the anthrax scare. “Direct mail was hit hard,” says Brown. “We lost millions of dollars worth of orders we had booked. And we didn’t have the reserves to keep paying all the overhead.” Eventually, the plant was sold and Brown “got hammered,” as he puts it. “In hindsight, the growth should have been projected out better.”
Brown’s experience is one of many good news-bad news dilemmas facing many entrepreneurs. Yes, you want your business to grow to enjoy future prosperity, but growing at a just-right pace is not easy. If you expand too rapidly, you may have to cope with unnecessary expenses. If you don’t expand when you should, it can cost you valuable opportunities.
“I’ve learned how difficult it can be to fine-tune your growth,” says Anita J. Hill, president and CEO of B&H International, an importer of lubricants in College Park, Georgia. “Not only can’t you move too fast but if you move too slowly, your competition will find out what you’re doing and take advantage.”
Hill launched KDI Inc. in the 1990s to produce disposable baby bibs. “I started by outsourcing
BLACK ENTERPRISE : blackenterprise.com : MARCH 2005
Yes, you want your business to grow in order to enjoy future prosperity, but growing at a just-right pace is not easy. If you expand too rapidly, you may have to cope with unnecessary expenses. If you don’t expand when you should, it can cost you valuable opportunities.
After her first business was outmuscled by the competition, Hill found a new venture.
manufacturing to Mexico to cut costs,” she explains, “and then switched to a company in North Carolina so the bibs could be made in America. At that point, we were selling to Kroger and Wal-Mart, and I thought things were going fine.”
Unfortunately, the plant in North Carolina couldn’t conform to the production schedule Hill needed. “I was set to buy machinery and retool it to fit my process, but I wasn’t sure if that was the right move, so I went to the Georgia Institute of Technology’s Economic Development Institute,” she says. “The engineers there looked at the machinery, they looked at the facility I planned to use, and they looked at my process. They advised me not to bring manufacturing in-house. By slowing me down, they saved me from doing something I would have regretted.”
However, Hill had been too slow to act in another area: gauging the size and scope of her potential market. “We did a survey [where we offered] a free bib and found there was a much larger demand than we had anticipated. By then, a major company had moved into our retail business so we got bumped from our shelf space. Next, the competition went after institutional customers, sending out free samples to our childcare center clients.” After an encouraging beginning, Hill folded her baby bib business in 2002 with only $50,000 in revenues, grateful that she hadn’t invested huge amounts in equipment. The experience brought home to Hill the importance of logistics in a manufacturing business and the opportunities in international trade, and thus led to her next venture, importing petroleum by-products from Trinidad.
How can a growing business avoid such pitfalls? “There are two main issues to contend with,” says Tommy Longest, 40, owner of Integrated Supply Management, a Detroit-based distributor of electrical and industrial equipment. “Financing is always a problem for a growing business. In addition, you have to look at each opportunity as it comes up to see if it fits into your growth plan.” Following that principal, Longest’s business has experienced positive, controlled growth over the last five years. “When I started my business,” says Longest, “I concentrated on customers who paid their bills on time. From my experience in this industry, if customers pay bills promptly, you can finance a lot of your growth yourself.”
Longest says that as his company got off the ground, his first growth-oriented decisions involved identifying the type of people he should bring in to help. “I decided to hire someone who could provide administrative support,” he explains, “leaving me to spend time working with customers. Since then, I’ve added some sales and marketing employees, but I still go out and see people. That’s the key to this business.”
Personnel decisions also led to Longest creatng a second company, ISM Electric. “Our original company provides services to utilities and local governments and property management companies,” he says. “We saw an additional opportunity to work with contractors doing large projects. You need different expertise there, however, so I hired some people who had experience dealing with contractors.”
Indeed, entrepreneurs who have learned the perils of branching out too rapidly may be more careful to grow at a more measured pace the next time around. “I’m now working with Trinidad & Tobago National Petroleum Marketing Co. Ltd., which has been exporting petroleum products for over 100 years,” says Hill. “The people there will supply the technology and do the blending while I do the marketing for lubricant sales to the U.S. auto industry. In a few months, I hope to have a blending facility in Georgia.”
Brown, too, is taking it slower with his new Oakland-based company, California Direct. “We have only 12 employees now and we’re not doing any of the production work in-house,” says Brown. “Our customers are mainly small to mid-sized companies, which are easier to work with than big ones, in many cases. Our overhead is down, I spend more time with my family, and this is a more cost-effective way to do business.” Although Brown still has growth plans, they’ve been downsized. “We’re aiming to reach around 40 employees in three years,” he says.” With 200 employees, which we had in the past, all you do is find yourself managing HR issues.”There are numerous potential risks involved with growing a business: hiring too many people, investing too much in equipment, leaving yourself open to your competitors. And, while there are no easy solutions to these issues, coming up with potential answers is more likely if you have an idea of where you’d like to go and how you’ll get there.
“One business owner I’m advising has a machine shop. He can’t find time to write a business plan so he spends time spinning his wheels.” says William Walsh, a counselor with the Service Corps of Retired Executives in Mayfield Heights, Ohio. SCORE is a nonprofit organization that provides counseling under a grant from the Small Business Administration. “Even though he is a skilled machine programmer, he still has to take time out to do things like make deliveries,” sa
ys Walsh.
“Eventually, he will have to come up with a plan,” explains Walsh. “He hates paperwork, though. To get him started, I suggested that he write one segment, then do another one. Subdivide the plan into sizable chunks and create it, one chunk at a time.” Once you know the right direction, you can follow the path to growth, avoiding the low road as well as the high road.
Green Light, Yellow Light
What are some of the signs that it may be time to branch out? “Cash flow,” says Tom W. Williams
A similar thought is echoed by Jana Matthews, founder of Boulder, Colorado-based consulting firm Boulder Quantum Ventures, and co-author of Leading at the Speed of Growth: Journey from Entrepreneur to CEO (Wiley; $24.99). “You can tell it’s time to expand from your incoming orders,” says Matthews. “When people begin to call all the time and you can barely keep up with the business as it comes in–that’s one of your growth signals.”
Bruce Phillips is a senior fellow in regulatory studies at the National Federation of Independent Business (NFIB) in Washington, D.C. “Our latest survey, Small Business Problems and Priorities, released in 2004, showed some of the concerns that growth can cause,” he explains. Among the study’s findings were the following:
- Controlling their own time is often a problem for owners of rapidly growing firms.
- Health and safety regulations probably occupy a greater share of a business owner’s time when the firm is growing rapidly. Many small companies are exempt from some regulations, but others can become burdensome when a business is quickly expanding.
- The frequency of tax withholding deposits is another problem that becomes more bothersome as business sales rise fast. IRS regulations, such as more frequent withholding deposits, then become a larger issue.
“The first step to take in dealing with growth is to add good people,” says Matthews. “As the owner, you’ve probably been doing a bit of everything, making all the decisions. You’ll never really grow that way, though. You need to add talented people and delegate responsibilities to them.” Putting together a good staff can be invaluable as you strive for profitability and prosperity. Bringing on additional people does not always mean hiring a full-time staff. You can use temporary professionals to provide help during peak periods. –DJK