Episode #802 - Why Your Business Isn't Growing And How To Fix That with Alan Pentz

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Now are you dealing with the entrepreneur? I guess it's a forest, you know, you can't see the forest for the trees type thing when you're in the middle of the battle. A lot of the times the to do list accelerates, especially if it's a well run company. It grows and then the problem with when it grows is things that you outgrow the systems and you know, the workload that your existing situation can handle. And then it creates all kind of confusions where people are doing two or three different things. Other options are coming up, you have to sort through them. You got to handle today's, probably got to meet today's deadlines and it can get over, you know, quickly get overwhelming in well run companies. And so what you're telling me is that the value that you bring to the table is helping them see, you know, like the, the forest for the trees type thing just kind of, and.

To be honest, that's sort of what I've focused on and now being more of what I consider a business owner and an investor rather than a consultant. You know, to be honest, I haven't done government consulting for like five or six years now. But even though I own the company, but you know, what, what, what I felt like I had to learn to get out of, you know, talked about that time when realized, you know, we were, we were losing money and realized we had to run the business in a different way was I had to go from being, you know, a consultant, operator. Like so think about it from a general business, not just mine. Like I had to go from really being the guy who did the work that I would call, I would call that being an operator. You're kind of like in the middle doing everything and you're the hub and everybody else is a spoke coming to you. I had to evolve from that to becoming really a business owner. And to me that was, that was really about building a team that could handle. So it wasn't hub and spoke anymore. There was a team that was managing the functions of the business across that then was reporting to me as a, as a leader, as a CEO, right? So that to me was going from operator to owner. And then I think the ultimate, like the transition I'm going through now is going from where you've built a team to really Crafting that team over time and building them into leaders where they have teams and you become what I consider the investor where really the company is mostly self managing and you're now looking across your company, other options, other investments, and figuring out where to allocate your capital, where the market's going. That, to me is sort of the journey I've gone through is like being that person in the thick of it to being the person building the team to manage the business, to now being the investor who's looking across multiple options and quite frankly, helping other people do what I did to build their businesses.

Well, what's been the biggest help to you personally in going through that transition and other transitions you've. You've had to go through?

Yeah, I mean, I'd say the number one thing that. So, so when I was losing money, this is probably 20 mid 2010s somewhere around there. I was not sleeping well. And we all know that, Alan. Yes, exactly. As the debt's racking up on the line.

Yeah, we all know that phase, unfortunately.

Yes, yes, yes. And so I spent a lot of time searching around. There was no lesson in business school about personal guarantees on credit lines. Right. They didn't teach you that because you were going to be at Disney with their massive bond portfolio or whatever. So, you know, I think for me, I started searching around for somebody to help me.

Yeah.

And I found a guy named Craig crabtree talking on YouTube about how to run. You know, he talks a lot about finance, but he, he talks a lot about a concept called labor efficiency and how labor is the lever that creates productivity in companies. And taught you a whole system about it. Anyway, it's not important what the system was, but I was like, it was like a ray of sunshine coming into my dark room where I wasn't sleeping, and I was like, oh, this guy's telling the truth. Like, this is amazing. And ended up hiring him. And Greg's been a mentor of mine for 10 years, but really that was the entree for me into business education, peer groups, and mentoring. So, you know, I joined the Entrepreneurs Organization eventually. When we got larger, I joined Young Presidents Organization, ypo. And what's the president?

What is, what is the president? What is that one?

Ypo Young President's Organization. It's, you know, business Owner Group. A little bit bigger qualification to get into than Entrepreneurs Organization. And so those are really peer groups where I met other business owners. I didn't really know other business owners at that point and did a lot of education. I've done Masterminds. I've done courses. I. I read a lot. And. And so it really took that peer group, being with other business owners to realize, oh, yeah, I'm a business owner now. So all the. All the, all, you know, and like, Greg has this great line that, like, once you get to gross margin, all businesses taste like chicken. And so, yeah, you can have all this different stuff in cogs and, you know, you have materials or not or labor, high or low, you know, but by the time you get down there, everything's the same. And so I could learn from people who ran manufacturing companies or other things. So it was really that peer mentoring and the knowledge I got from learning days at EO and, and going to. I'm doing this entrepreneurial master's program that's part of eo. That's where I really learned the concepts that helped me turn around the business. And frankly, we've grown it quite large now and we're on a real tear. And it's all because of that learning.

What were some of the biggest light bulbs that went on for you from that process or in that environment that you can remember other than, you know, you went from doing to getting the job done, you know, and, you know, running the company that does the job rather than doing the job yourself? You know, that's the entrepreneur myth that, you know, I've got a company, but really I'm the only guy working there.

That's right. Yeah. Yeah, you got a job.

Yeah.

You just happen to pay yourself.

Right. So what would you. Other than that, you know, where you got the picture of, you know, which is important. You got to get the picture in your mind of what you've got to be now. But what are some other things that kind of light bulbs that came to you from that, you know, that kind of origami out from that, you know.

Yeah. I mean, there are three main things that I think are crucial for me. The first was what I mentioned with Greg, which is that all business is about applying labor to problems to create productivity for customers. Right. So labor is what it's all about. The cost you pay for it, the leverage you get out of it, all that. So. And then kind of related to that. So I, I measure that very closely, and it's a. It's a benchmark we use throughout all the companies that I'm involved with now. But related to that is the concept of that. There's a guy, Brent Beshore is a great. He has a kind of permanent hold private equity company, and he said all small Businesses stay small for a reason. And my corollary to that was, and it's because of the owner, and it's because the owner won't make the decisions they have to make. And those decisions almost always involve poor performance of team members and. Or not just poor performance, the inability of team members, particularly leaders, to grow as quickly as the company grows. So I think a fundamental insight was the, you know, it's the. The people who got you here won't get you there.

Right.

And every time the company doubles or triples. You know, my estimate now is 50 to 75% of the. The leadership team needs to turn over. And that was a harsh reality that I did not want to deal with for a long time. And I said my company didn't grow for several years because what was the.

Breaking point where you absolutely had to face up to that issue?

Yeah, I mean, it was like facing the loss of clients and not seeing growth for a couple of years. So, like, I've had that happen two or three times throughout my career. And, you know, you can talk to people about, you know, I built a leadership team and you go day to day making decisions and you can kind of make excuses for why things aren't happening. You can understand the reason in the moment why XYZ isn't growing or this client isn't happier than they should be. And you can kind of go along with those excuses. You're kind of a part of the decisions that are made.

Yeah.

So sometimes you feel like it's partly your fault, which. Sure, I'm sure it is. But at a certain point, you've got to say, all right, I have repeated patterns. Like, I always just say, whatever department all the problems are coming from, that's the leader you got to replace. Right. I mean, it's clear if it just keeps happening.

Right.

That's the problem.

Right.

It doesn't really matter what. What else is going on.

Yeah. And.

And, you know, I think that the issue is, you know, you're a $5 million company, say, and you want to get to 10, and you're not growing well, you don't know how to grow. And nobody else on the team knows how to grow to 10 because you've never done it. And it's not anyone's fault, but you're like the one person who isn't going to go. Right. Unless you sell the company. So it's sort of like, all right, the person who's going to fire the people and hire the new people. I guess that's going to have to be me because no one else is going to do it. So, so I do think that it's just a, it's a kind of a, it's a hard thing. It's a hard lesson to learn. And I fundamentally believe that one of the reasons most companies don't grow is because of this issue that business owners don't want to clean up the, the leadership issues. I mean, it could be some other stuff too, right. Obviously, if you're embezzling money or spending all your money on Ferraris, you're not going to grow either. But, but mostly I think it's. They hold on to they, they prize loyalty over the growth of the company. And that's. If you want to do that, that's fine. No shade on anyone's decision. It's just, you know, companies can grow a lot faster than people. Yeah, that's the reality.

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Those three things that I just think there's more there. Could you, you know, I don't want to run through those because those are really powerful and that's kind of a lifetime of observation plus going through those experiences yourself. But those, those three, I'd like to pull them. If you'd pull them out again and roll through them, it, I think it would be help a lot of people.

Yeah, I mean, so first was the first thing you need to understand in business is to measure the efficiency of the labor you're employing on whatever tasks you're employing it on. So that, that, that isn't about, you know, the second issue is a little more about your leadership team and, and that kind of thing. But the first is really like.

Am.

I employing the right mix of labor to make money off of what I'm doing? And so, you know, Greg Crabtree has a, a simple calculation called his labor efficiency ratio. And so you should be making $2 in revenue. I mean Greg usually takes out subcontractors and materials from that, but either way it depends a little bit on the business. But basically you should be making $2 in revenue for every dollar in labor you pay. And that's pretty universal across businesses. Again, some adjustment for cogs. If you're a construction company and you do $18 million in pass throughs and you're a $20 million company, you're not going to have a 2D 2 lar but once you take out that pass through, that's what you should have the two on. And that's just like it's almost fundamental across all businesses. And so I urge all business owners to start there. Like is the labor you're employing getting you the revenue you require to run a profitable, decent business? And so that's like the first thing.

So you would compare that by doing the gross labor expense versus gross revenue, is that right?

Right. And with the exceptions of like if you have a lot of you can take out pass through like subcontractors that you're not managing and some materials. But yeah, like he calls it gross margin. It's a. Anyway, it gets a little complicated with what figure you're using. But basically take revenue minus subcontractors and direct materials and you should be getting $2 of that revenue for every dollar.

Of labor regardless of what business you're in.

Regardless of what business you're in. And almost all of them go in a narrow range around that too. I'm sure like Google and Facebook are different, but if you're not getting that, you don't have a good business and you should go get another business. Yeah, so that was the first realization I had and you can really measure and hire around that metric. And it's kept me in good stead for 10 years now. The second part was really focusing on the leadership team you have is what will determine whether you grow or not. And every time that revenue figure grows two to three times, you're going to have to do surgery on that leadership team. It's not going to stay the same. You're not going to have people from 1 million go to 50 or you could have one person. Right. But you're not going to have the whole team go with you the whole way. And so that is an important caveat. There are one or two people who probably can take that journey with you, exceptional people.

And to shed some light on the point why that happens and so you should made up, make up your mind to try and fight it too much is the fact that usually that's a company that has done well, you know They've got, you know, increase and people are feeling good, they're not feeling like crap. You know, I've got to get two or three times better. You know, they're all the mid level managers are feeling pretty good about things, you know, and like, you know, they're expecting some pay raises and, you know, some bonuses and expecting some good rewards because things have grown and they've had a role in that, but they haven't been the driver. You know, the difference is who's the driver of this thing. And you need people with more drive as you grow your company. You can be the driver, but you need more. It's a lot easier if you've got some more drivers involved. I find that the higher level of an employee is, has to do with their initiative and their energy they bring to what they're doing, are they thinking, and that stems from what they want to do. And so when you get a batch of people they've been doing well, they're not really as a group probably thinking about, I gotta get two or three times better like the entrepreneur. Because I know when I ran the salesforce every October, I started evaluating, you know, has a year gone the way I wanted? You know, what's it going to be next year? And the one thing I would always say to myself, I don't want to be the reason we don't grow next year. You know, I can, I can take that. You know, I can take just about anything, but I don't want fingers pointed back to me. You were thinking too small. You didn't make these changes, you know, because the one thing an entrepreneur should do is take yourself out of the equation of, of being the problem. Just make sure you're not the problem.

You know, on these things. Exactly. And yeah, and I don't. Go ahead. And I don't think I hit the third thing actually. So the third thing I think I really learned that I think is fundamental is your business is an asset and you have to treat it as an asset. Right. So I think that owners turn it into their life, they turn it into their family, they turn it into all sorts of whatever. It's always a reflection of the owner.

Right.

But I think it's the most healthy. When you get into that investment mindset where you're the investor looking at it as an asset, that helps you look at it more objectively. I always try to say, like you should, you should think about an acquirer. What do they look at your company?

Right, exactly.

Because that really helps you make smarter decisions. And look, the market is the market. You're not. Yeah, there are innovations and there are, there are disruptive innovative firms that do totally different things. And I don't deny that and think that's great and you should try to do that stuff. But the reality is you're not going to transform a business into something else. It's always going to be an asset.

Right.

And you're much better off understanding it that way and then always trading off like, is this asset the right asset that I want to own? Is it? Can I improve it? Can I do this? You know, and so I, I just think that helps you have a third party perspective from the market that you don't get too wrapped up in the sort of team and family inside the company as well.

It's almost like, you know, if you, if you had the balls, it's almost like you ought to try and sell your company periodically.

You know, you should really just to.

Hear what people would ask what's important to them and get the feedback. You know, just getting honest evaluation. Those are the people who give you an honest evaluation of what you got. And I mean where your head.

Hopefully you don't, hopefully you don't pay the lawyers. But yes, I agree that to be honest, I think one, you know, sort of a version of that is you should probably go talk to brokers and investment bankers in your space periodically. Hey, what I mean I do that all the time. What are you seeing? Like what does this company look like compared to others and what are the key factors and you know, keep that market discipline.

Definitely where you work with the government there is a big danger. You talk, you mentioned a couple of times we went through this, it's like revenues started drying up and you know, we need to restock the pantry with clients. There's a real danger of, it seems to me, you know, from the outside that there'd be a real danger of being too big of a government contractor because you know, it seems like there's, the more clients you have, you know, you got some stability but you know, you can get to where like you work with Walmart and Walmart owns you, you know, or General Motors owns you and you know, pretty, pretty soon you're back to being an employee again. You know, you're not the raging entrepreneur. And so what have you found out about government contracts and how people should approach that? Which would be the same to if any big company, you know, you know, providing product.

Yeah, I mean I think, you know, I've heard that the customer concentration idea in there I mean, to me, working for the government is like my clients are pharma. Right. Or my clients are all the auto companies.

Right.

I mean, government's really a different agency by agency, it's a very different beast. But to your point, it does have cycles. And when we were losing money, it was during the sequestration time after the Obama Boehner budget deal. And you know, the government budgets were flat to down and the government was competing a lot of work at low cost, technically acceptable and it wasn't a great time. And to win work, you had to really cut your rates down and we weren't willing to do that and blah blah, blah. So yeah, I mean, my business has cycles like any other business. Right. But I'm invested in several other businesses now and they're on the economic cycle with the economy and I'm not. So it's also nice to be on a different cycle. So your stock portfolio can go up or down and the business is going in a different direction. Right. It's nice.

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