The Appropriate Depth: A Leader’s Guide to Excellence in Small Business Ownership

Running a small business is challenging. I would argue that it is more challenging than running a larger organization. There are usually fewer resources (common excuse), but more importantly, there are fewer established procedures; or worse, there are well-established poor procedures. I like to look on the bright side and tend toward assigning a positive treatment of this attribute. Small businesses can change faster. Therefore they can improve faster. However, risk can accelerate infinitely faster. If the change management process is discombobulated, then brace for improvements to take even longer, resulting in more problems than solutions.

Fear not. For I have gone across the mountain and have some good news to report back. Positive changes can take place. Pace yourself according to the range of your teammates.

And right there is the “appropriate depth” for the owner. If she knows her teammates well, and they know her, the convoy will stay together and advance faster than the slowest person would on their own. Achieving this upward pace velocity is what ownership is all about. And the joy of sharing it with people you care about.

Most owner-operators change quickly but use less structured methods. They say things like, “trust me.” Or, “let’s try it this way.” Or, “because I said so.” This may or may not result in excellence. Where excellence is produced (it sometimes is), the ultimate size of the organization is often throttled by the average revenue per employee. Thus, an enterprising owner-operator should look for very high revenue per employee opportunities to extend their ownership services and rapid maneuverability across more dollars and fewer people. Personally, I think this is why real estate becomes so attractive to small business owners. They can continue to drive revenue per person upwards without adding management talent… to a point. And while real estate is not risk-free, the tangible nature is less dependent upon management excellence to sustain the core value. Other attractive businesses with high revenue per person industries include asset management, insurance, banking, and even utilities.

In a typical small business, the leader usually wears both “owner” and “general manager” hats simultaneously, regardless of the given titles. This typically means he or she oversees all strategic and resource allocation decisions (as owner) and installs all process changes to sales and operations first hand (as the manager.) Most people call this an “owner-operator.” It can be glorious for customers and teammates alike… when things work.

We have purchased control of twelve small businesses, and every single one of the owner-operators had working businesses. Some were decades old, and others were much younger. Everyone had regular routines, but none had documented the process to install changes. This metacognitive aspect of owner-operator is one of the reasons I think they sold to us. (not that I’m particularly good at documenting change processes, but simply because I could relate with the “why” and the “how” of small business owner-operators. I personally “got it.”)

After we got involved (bought them out), we had to recalibrate my methods. This took some time. And despite a compelling vision to “hire great people and let them go.” I’ve come to think this is a bullshit cop-out. The real solution is to have the appropriate depth. You must still hire great people and trust them, but you’ve got to be involved in a helpful way. You are inextricably part of the team, if not a primary reason the team stays together. And, as a friend said, “you’ve got to be able to call BS.”

After a few years, there is a right and appropriate depth for the owner. If you are presently a small business owner-operator who would like to develop more free time and less managerial responsibilities, or you are an aspiring passive majority owner, I have a few warnings and a few tips or tricks to share.

  1. Forget becoming a passive, majority owner. It doesn’t exist. All “else statements” ultimately consolidate back on you. You have 100% responsibility. You delegate authority. So, put out of your mind the idea of 100% passive majority ownership. It does not exist. Or, prepare to have your companies deteriorate quickly.
  2. Decide if you prefer minority or majority positions. What criteria determine that? It’s normally a temperament and passion issue. If you don’t want to leave in the middle of a ballgame or vacation, don’t become a majority owner. If you are open to moving between minority and majority based on the conditions available, you are really saying you are a majority owner of your sole proprietorship. I encourage you to consider selling your majority ownership and becoming a minority owner. Ponder why you would not want to do that. Write down your reason(s). Stand by them. Focus. If you prefer minority ownership because you can dodge the responsibility of being the “buck stops here” person, then know that and avoid majority ownership. Partner with owner-operators and/or dedicate yourself to marketable security selection. This can be quite profitable with focus and strategy. I’ll leave this minority position aside now and write the remainder to the majority owners still reading. (I warned you this is a bit wandering, right?)
  3. Hire people you like and trust. Business is the gathering of people around an idea. As the majority owner, you are both the glue that holds people together, and you are the pry bar that ejects those who do not fit. Conditions change. Re-evaluate things. Hire slowly. Fire quickly. And, finally, do it with respect. Trust is something you can only build up through time but can be destroyed in a moment. Yet, trust is probably the foundational element of all profitable businesses. No written process can be faster and cost less. Develop it throughout all interactions, internal and external. If you have minority owners, treat them with respect and care. Your roles may someday reverse.
  4. Provide vision and direction. People will gather around an idea, but they want to feel productive. They want to move and accomplish. We are made to be creative and build things. Guide people in a direction and vision of what the final thing might look like. Carve up some intermediate steps. Place some milestones, so people know if they are making headway. Do this yourself. People care about these things, and you’ve got to burn them into your brain. Also, people will try to pull you away from the core every single day. So you must clearly identify that core for yourself.
  5. Seek feedback. Whether you build or buy, and whether you have a team of five or fifty, you can and should ask for feedback. If you keep your vision to yourself and are the only one authoring the milestones, people will disengage. You want them to resonate with the purpose and discover new and better ways of working out the “how” and the “what.” By seeking feedback, you make it safe for them to propose new ways of doing things. You don’t have to agree with every proposal or even a certain ratio of proposals. Instead, you can work out the methods and procedures together. Select the absolute best. Some of these ideas will originate from your team. Some will come from you. The goal is not to get all of the ideas from the team. The goal is to get the best ideas executed. Invite them to make things better. Most will be able to improve upon it. Give them credit. Give them more credit than they deserve. They’ll rise to the occasion.
  6. Take rocks out of other’s backpacks. When we started Little Engine Ventures, I had a core group of people who trusted me with their cash, time, and reputations. They effectively said, “yeah, that idea is close enough, and I think you/we will figure out the details.” I cannot thank them enough. This super is humbling to me because I look back on my boldness and see how ignorant I was. One of my first stupid mistakes was employing great people and then loading them up, asking them to figure it out. I didn’t do it out of meanness. I did it out of love. It’s how I wanted to be treated. Don’t micromanage me. Give me adequate resources, a rough vision and hard challenge, and space. I’ll solve it. Or, I’ll tell you, it’s impossible. What happened when I did this is people didn’t tell me I was nuts. They trusted me to figure it out, and they didn’t want to let me down. I trusted them to figure it out. Those that told me I was nuts, I’d say something smart like, “yeah, but I’m the right kind of crazy.” To which they were supposed to interpret as what? Ultimately, what happened with this type of madman leadership was nobody figured it out. Once I saw this story start rhyming, I called myself nuts and got to work. I started going deeper and taking responsibilities and authority off of them until functionality returned. It’s a bit like the parable of the talents. Everyone has equal amounts. Who does well? Who buries it? Then, update the resource allocation. I discovered some common elements that I could do very easily but were very difficult for them. I removed these impediments by doing them myself and/or reassigning them after I pulled them back. What happened was flourishing. It wasn’t overnight, but it is occurring. It’s not permanent, but it’s perpetuating… which might make it enduring and anti-fragile. It’s a living thing that we all safely revisit. If you are an owner-operator looking to step back from operations, I encourage you to hand off way too much authority and see what happens. People will move in directions that will surprise you. Observe. Then, come back around and prune those who are wasteful or misguided. Nurture those who show promise. Help. Develop insights.
  7. Specifically, I have found, for me, these specific areas are critical to go deep:
    • Finance – from the very beginning, I have controlled the balance sheets of our controlled subsidiaries… well, mostly controlled. Other areas include reporting, compliance, audit, and tax. This stuff is required and adds very little business value. Any GM that wants to do this as their main thing isn’t actually a GM. A GM runs ops and sales.
    • R&D – in small business land, this rarely gets adequate attention. I like to emphasize “development” rather than basic research, which I mentally associate with biotech and drug development. It’s better to think about procedure development in most of our businesses. However, it may sometimes be basic scientific research. That distinction made, the point is the owner needs to participate in the exploration phases before ideas are adequately robust to convert to exploit mode. If the GM gets there before you, there is likely to be tension. If he or she proceeds with changes without you adequately bought in, this could spell trouble. Get involved at an adequate level to make decisions. You must determine that for yourself. It’s probably further than you think.
    • Legal – also, an area where no value is added but lots can be destroyed. Know what is going on. Keep your pledges your pledges.
    • Human Resources – While you don’t have to interview and hire every single person, you should know, authorize and monitor every single person to an adequate resolution to make decisions. I’m sure some people will read this and say it won’t scale, but until you are out of the SMB category and then some… like 1,000+ people, I think this is a critical area to stay very involved in. Who are the people you’ve gathered? And who are those people attracting? Know them and care about them. Help them. If it’s not a fit, move on.
    • Forecasting – I’ve seen way too much time spent on this at the subsidiary level. Maybe I’m too inclined toward action and figuring it out as we go? Maybe I do this stuff in my head? I don’t know. But, what I do know, is that you, as the owner, have to get a very firm belief baked into your mental forecasts before bold action can proceed. You’ve got to think about how pricing, units sold, costs, employee count, raw materials, cash flows, and fixed assets proceed. You’ve got to model and forecast everything in your head in a fairly reasonable and actionable way. If you require statistics from every major trade researcher, then get them yourself. If you decide based on a hunch, then have the right elements to do that with your own style. I like to think I am somewhere between these two extremes. However, depending on the day, I can be found hanging out on one extreme or the other. Some decisions depend on deep data (the way we fill the inventory void at a distributor, for example). At the same time, other elements can be more philosophical (we’re going to run the lowest price we can afford and still maintain our target profit margins.) Personally, I have learned just how violently I move between extreme forecasts and use them in various ways and areas. Frankly, it’s how I do what I do. I probably know more statistics about our lines of business than anyone inside our teams, and I probably think about them better. I know what power law is and what is the normal distribution. I know how and where we suck. I know how and where we are excellent. I did not always know these things. And, I never know everything. But, I think it’s critical to know, to a degree, that you, the owner, can maintain conviction despite torrential issues pouring over you—stand firm. Believe. If you don’t, no one else will. (yes, I do realize writing these things makes me sound like a know-it-all jerk. Yes, I am still thinking that way and recommended that the owner know his business.)
    • Real estate – Long-term assets sometimes wind up on your balance sheet for strategic reasons. Building maintenance and improvements can distract managers. It can also eat up or degrade your balance sheet fast. Stay involved. (this is probably a “duh” category for our limited partners, who nearly all own some real estate… for the newbie and/or the owner-operator considering a more passive future, this is an area that you are likely to remain involved in forever, or could/should consider diversity if you are looking and thinking about reducing your responsibilities/involvement to an extreme degree.)
    • Insurance – I love insurance and hate buying it. Make sense? Risk management is what I do. It’s core to how we make money. We take on mid-priced risk with the probability of profit. If you delegate too much in this area, your employees will transfer away all your profits. They are risk-averse by their nature. That’s great. They help keep you out of trouble. Have them make recommendations, and then you decide.
    • Procurement – speaking of spending away all your profits… employees, bless their risk-averse souls, like to spend. It’s not because they are wasteful even. It’s mostly because they do not see the whole picture. They buy another hammer to “save time” or buy another truck to keep the coworker satisfied. Or, they spend $5,000 on repairs when they should have just junked the truck and a $40,000 replacement purchased. Here’s the thing, they see only their portion of your world as the owner, and they see how they do their own lives. They make comparisons and decisions to save and invest in ways that are different. It’s not mean-hearted, but it can become debilitating or slow for them… trying to guess and triangulate what you think about this or that purchase. Even if you only own one business, you likely know and have more going on than they realize. And the interactions of their actions with your other actions (directly yours or the spending of other managers) can cause things to go awry quickly… even if things are moving in the right direction. Despite my “I trust you” rule, we did not have any fatal blunders, but there were pockets of spending that made little sense to me. I tried to coach and coach and eventually installed some stupid simple rules. I was driven to these rules after fourteen $5 hammers to “save time” to $20,000 graphic designs to “look professional” kept crossing my view. Thus, procurement of dang near everything has to be on your mind regularly… and at a resolution, you can call BS before it is purchased. I greatly resisted this because I didn’t think it scaled. How can I review everything? That’s crazy talk. However, what I found, was employees prefer small spending limits. It gives them known boundaries that are closer to their comfort level, which is largely experience. These “low limits” are easy to increase after building rapport, and they have demonstrated good decision-making. It’s hard to undo the purchase that never should have happened. (can we return hammers used only once, please?). Anyways… the specific recommendation herein is to set up some minimums by position, starting with zero for 90% of the staff. Move up slowly only when it becomes a wasteful burden on you. You’ll be surprised how far you can go and how well everyone will do. Review everything (even sub-limited spending) and set up systems to flag abnormalities. You’d be surprised at how quickly and how large this can scale. Call BS occasionally. But don’t be a jerk. Care. Demonstrate discipline. Finally, assign strategic expenses to one or two lines where you encourage spending. Celebrate growth in these areas. Call everything else non-strategic and aim to lower the lifetime expenditures through creative design. Participate in the development of these new processes with the team. It’s actually fun.

Thank you for reading this far. I have used the word “I” many times. I can only write from my own voice. Our managers, if you are reading, are fantastic. We’ve been through a lot. You tolerate me. If I’ve said you follow me a little too strongly, I apologize. But it sure feels like you trust me. And I know I certainly trust you. Keep up the good work. Take care of customers. Do it for less than we charge. Improve. Continue. We are winning, and things will keep getting better. I promise.

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