In our experience, most small business owners want to grow their companies. There are many reasons to grow your business, including economies of scale. However, some entrepreneurs who could ordinary grow their businesses instead choose to limit the growth of their enterprise.
Sure, we’ve heard the mantra: You have to grow or die. Yet we have found example after example of business owners who debunk this myth. Here are five primary reasons we've discovered why these entrepreneurs have decided to limit the growth of their businesses.
1. Time needed to achieve profitability
New businesses may take a while to reach profitability, as their owners refine the business model. In fact, we have often advised entrepreneurs to ensure they have a profitable business model before growing.
If it costs you $7 in material and labor to make a widget that you sell for $5, you’re not going to make up the difference in volume. We worked with a home healthcare service that routinely deployed caregivers who cost the company more in wages than the client’s bill rate -- that is, until we pointed this out to the owners. Obviously, you can’t stay in business long with this model.
2. Aim not to put financial stability at risk
When a business is throwing off sufficient cash for the owner to achieve his or her financial objectives, many people decide not to incur the additional risk associated with further growth.
A conversation we had with the owner of an automotive body shop illustrates this. He explained, “My house is paid for, my cars are paid for, my river house is paid fo, my boat is paid for, my jet skis are paid for, and the building that houses my business is paid for. I have a lifestyle I love.
"Yes, I could grow my business," this man said, "but that would mean opening new locations. I’d have to make a significant investment in equipment and buildings. That would be risky. I already have everything I want; I’m not going to risk losing it.”
3. Unwillingness to let go
We know a fantastic interior house painter. He likes to do wonderful faux finishes in high-end houses. He is a true artisan. However, he can’t or won’t delegate the painting to anyone else. He believes that no one can produce the finishes he can. So, if he continues to insist on spending his days with a paintbrush in his hand, the size of his company will remain limited by his own capacity.
Likewise, we know a very successful concrete contractor. Growing his business beyond its current size would require delegating day-to-day decision-making authority to others. He would need to install a level of management between himself and the primary workers. He is unwilling to do that. Therefore, he has made a conscious decision not to expand his business.
4. Avoidance of regulation
A small bank we know reached 45 employees. At 50 employees, it would become subject to the Family Medical Leave Act (FMLA) which carries significant recordkeeping requirements. The company president decided not to cross that threshold by choice, to avoid the bureaucratic requirement.
A general contractor with four employees laid all of them off and became a solopreneur because he was tired of dealing with all of the paperwork required by having even a single employee. He told us that the cost in time to complete and manage payroll, taxes, workers' compensation and other requirements outweighed the benefit of additional manpower.
5. Wish to maintain sustainable growth
In some businesses, growth requires capital. Consider a business that has thin profit margins, and requires significant inventory and accounts receivable. A dollar of sales growth may well use more cash than it throws off in the first year.
When this is the case, owners are faced with a decision to either obtain external financing or limit growth to a rate that the business can sustain through its own internal cash generation.
Most small business owners want to grow their businesses. However, there are valid reasons that wise entrepreneurs may choose, to limit the growth of their enterprise. Are you one of them?