Guesswork Unveiled

July 27, 2024 | Issue #101

Guesswork Unveiled: Lifting My Business Out of the Trap

This is a different post than most – I’m launching a new initiative in my business and want to bring you along for the ride (aka more content, more up-close & timely writing, and potentially less anonymous…).

First, some background. Small service contractor businesses have a “trap” size. I didn’t come up with this trap concept — I can’t recall where I first read about it, but my guess is that it was either Alan Pentz or John Seiffer, who both write excellent SMB operations content.

Here’s how I’ve seen the trap size work in the small service contractor context; the concept applies more broadly, but the revenue figures are specific to service contractors i.e. limited COGS:

• Small, Highly Profitable Business: Under $2 million of revenue, the business can be managed smoothly by the owner. The owner can wrap their arms around the whole thing and operate it well, with good margins. This has the least overhead (both in $ and in % of revenue). This is how many self-funded search deals start.

• Medium, Lowly Profitable Business (Trap Zone): Between $2 and $4 million in revenue, business operations are too large & complex for the owner to manage themselves. At the same time, the P&L is too small to take on a true manager layer from a cost perspective. This is the trap. The owner is too busy to grow the business, so they can’t grow out of this middling size. Their life is stressful & chaotic, and the business is oddly low profitability. And if you do attempt to add an overhead layer, your budget is tight and still represents a high % of revenue…worst of both worlds. This is where many self-funded search deals get trapped.

• Large, Moderately Profitable Business: If you can clear the ~$4 to $5 million of revenue hurdle, now the business can operate smoothly again. There’s enough room on the P&L to have a proper manager layer to manage day-to-day operations. The owner can step into a growth-oriented strategic role. This stage has a lot of overhead on a $ basis, but it’s reasonable on a % of revenue basis – your margins are healthy. This is the end goal for many self-funded searchers.

After two and a half years operating my small business, I am clearly in that trap zone.

It’s been clear to me for the past 3-6 months that in order to get out of the trap, I need to hire a real Operations Manager. This person would keep the trains running on time, manage vehicle maintenance & equipment, and oversee staffing & clients. This would free up my time to focus on marketing & growth, system optimization, and selective M&A.

But I simply don’t have the budget for this crucial hire.

I’ve thought through various alternatives to making this hire, but through discussions with my small business peer group & mentors, I’ve determined I simply have to make room in the budget. So, how to fund it?

There are a lot of ways I could do this:

• I could put cash from my savings onto the business balance sheet to pay for the Operations Manager

• I could just use cash from business savings, which would impact our liquidity picture

• I could harshly cut costs in other areas of the business

There’s no “correct” answer. For me, the best answer hinges on what least disrupts the business and what causes the least amount of mental stress & unease. I know myself well enough that running a cash flow negative business makes me less effective in all facets of my life, from work to personal relationships.

So for me, the best answer is to meaningfully reduce my own salary and use the freed up cash flow to hire an Operations Manager.

Guesswork Unveiled

To help fund this Operations Manager hire, I am launching a new paid section of my newsletter, titled Guesswork Unveiled.

Who this is for:

• You’re deeply curious about the SMB/ETA life & adventure, but aren’t quite ready to make the leap yourself

• You’ve been following my story for years and want to have a close-up seat to this crucial transition phase in my business & growth as an operator

• You geek out on operations in a small business context

• You’re in a similar stage with your business and curious to watch someone else try to get out of the trap

• You simply want to support & invest in high-quality small business writing & content

• (You’re simply curious who I actually am and your internet research has proven unsuccessful to date…I will (most likely) reveal my identity in this subscribers-only section.)

What it is: Guesswork Unveiled will be weekly/biweekly journal chronicling my journey building my business — starting with hiring & training an Operations Manager.

• It will be a paid subscription through Substack.

• It will feature less polished writing, more raw wins & losses, lessons learned, etc. I hope that it will provide a direct insight for you into implementing a similar role in your (current or future) business.

How to subscribe: If you’re a new subscriber, just put your email in the footer below! If you’re an existing subscriber, please head to the home page at this link, and then click on “upgrade to paid” in the top right corner!

Looking Ahead

I will continue to write free posts roughly once per month. My time investment for these free posts are supported by advertising/referral revenue from the Trusted Search Deal Team – please check out these recommendations as you get serious about your search journey.

Thank you for your support through the first 100 posts of this newsletter. I’m hopeful the next 100 posts continue to add value and support you in your respective entrepreneurial journeys.

For those of you who choose to subscribe to Guesswork Unveiled, a million thanks in advance for investing in taking my business to the next level.

Thank you,

Guesswork Investing