How to determine if a new venture is harming your overall business.

One of the key challenges for many independent business owners is when to face the fact that a decision they have made is harming the business. In a large company, poor decisions are made all the time but don’t tend to linger as long as they do in small family-run businesses.

Let me give you an example. Let’s say the president of a large company with many locations decides to do business with a large national customer. Terms are negotiated and off they go. Now if the work relationship is poor in the field - where it matters - the president will start to hear rumblings of discontent, then the noise will grow as location managers voice their displeasure and start to illuminate all the problems this customer is bringing to them. If they just didn’t have this one customer, their location would be doing much better. That kind of thing.

The rumblings grow into a spewing volcano of negativity. All but the most tone-deaf presidents will realize that the damage this customer is bringing is not worth the effort and the relationship will be terminated. Normally, they find an employee scapegoat or two, assign the blame to them, kill the relationship and declare victory. It isn’t always pretty out there in the real world.

In this same company, if the manager of a branch location embarks on a new venture of his own making, his boss will be watching the results through the company’s income statement. If the business is losing traction and the new venture does not begin to produce results quickly, the local business manager will be forced to cease and desist whatever new venture was destroying value. All of the above typically happens over a period of months.

This check-and-balance system tends to prevent really bad business ventures from lasting too long. In a small family business, there typically aren’t those same checks and balances. Employees who are paid by the hour will do whatever work is put in front of them without significant grumbling, assuming the paycheck is on time and accurate. There is no boss asking hard questions and making the owner defend his decisions. As a result, from my experience, bad business ventures are allowed to live way too long - years, not months.

By business venture, I am referring to new service lines. For a plumbing contractor this could include adding:
  • Water conditioning;
  • Drain cleaning;
  • Underground repairs;
  • HVAC;
  • Electrical service; and/or
  • Appliance repair.

It could be a plumbing company specializing in new construction that adds a residential service division or vice versa. It could be a decision to start to do business with a national retailer or a home warranty company. You get the point. It is a departure from the primary focus of the business.

None of the ideas above are inherently bad. Large companies in our industry typically have multiple lines of business, and successful companies perform each at a high level. However, just because it works for one company does not guarantee success for another.

In fact, when a company is experiencing a financial challenge, once you peel back all the issues, typically you will find that there is one business line that is destroying most of the value of the business.

In the typical small business, this fact is hidden in the numbers. There is not a specific income statement that is created for the new venture other than revenue may be tracked separately. There are no expenses assigned to the new venture that are bumped up against revenue each month. It takes a little detective work to figure out what is going wrong.

How To Find The Culprit

If you have the suspicion that there is one service line or large customer in your company that is destroying the value of your business, the chart on page 54 is a simple “plug-in-the-numbers” analysis. I encourage you to input your real numbers. You can use whatever prior time period you choose - one year, six months, three months.

Don't Forget

Make sure to look at one more thing. Take out your accounts receivable report and look at how much revenue from this work is past due 60 days. Even though you may show you are making incremental margin dollars (notice I did not say net profit), you don’t have this money in the bank and it is not available to you to run the business. Keep this in mind when looking at the viability of this venture.

If this number is negative, ask yourself an important question: Can I legitimately say that this number will be positive within 90 days either due to legitimate cost cuts that can be made or revenue generation plans that I know I can implement?

Be honest with yourself. Too many contractors have been anchored to an underperforming business line for years thinking that the turnaround was just around the corner. “As soon as the weather breaks…” or “When the economy improves…” or “When all my customers know about it…” or “When all my techs get trained…” or “Once I land that new sales person…”. I could go on and on.

I love optimism. I really do. I like being realistic even more. Be real with yourself and the abilities of your company. It is OK to try mightily and fail. It does not mean that you are a bad person or a bad business owner. It is even better to try mightily, fail and then turn your focus to something that you are really good at doing.

Now if the number on the bottom in the example was positive, I still want you to think hard for a moment about the following:
  • How much time and energy did this service line take from you and your management team?

  • Could this same time and energy have created a larger incremental margin number if focused in another area?

The first analysis was objective and easy to understand. The incremental margin number was negative. Here, while there may be a positive number, it still may not be a good idea for your company. The key consideration is if this new venture is the absolute best use of your time and limited resources right now.

We have all had an employee in our company stand there and defend a bad decision he has made. You stand there incredulous at what you are listening to, just shaking your head at the faulty logic and the effort he is making just to avoid saying he was wrong.

Don’t let that be you when it comes to defending a decision you have made that may not be turning out as envisioned. Every great business owner in our industry has made many mistakes. They have just avoided the really big mistake of not being honest with themselves.