Latest / The Enterprisors / The Missing Profit — Why Most Founders Wouldn't Survive Their Own Standards
Transcript
- Tim Meadows-Smith: Welcome back to the enterprises. In most mid-sized companies, half the potential profit is missing, not 10%, half. In a PE-backed business, the responsible leader would be sacked inside two quarters. The only reason the founder is still in post is that no one is holding them to the standard they would hold anyone else to. This episode turns the familiar politics story, civil servant resigning to save the minister, into a founder's mirror. Welcome back, Tim, and thank you very much for joining me again. Great to be here. Good. So Tim, this is quite a provocative place to start. You're saying that most CEOs wouldn't survive the standard they apply to anyone else in their team. Is that really true? I think so. When you get to the mid-size, you've got probably, I don't know, 10, 15 years of proof that you're really good and it's working. Yeah, you have. Only it isn't really. You are a ⁓ lot better. than most if you've got to mid-size, you're in the top half percent of all founders. But the difficulty is that you know not much more than you did when you started, other than the mistakes that you've made and the things that you've learned from your own mistakes. If you'd been in a big company, you would have been trained all the way through. You are actually at the mid-size relying on people you hired when you were half the size. and they were pretty good when you were half the size and they're now out of their depth. And so everything has to come from you and you are not talking to anybody bigger than you understanding where you need to be. So no one's holding you accountable for your decisions. Nobody you're talking to knows any different. Nobody knows what good looks like. And of course the professional investors that you find in a PE firm are really good at understanding what makes a mid-sized business work. And they try to invest in companies that have people who've got those skills. But if they haven't, they're out within a couple of quarters. ⁓ A PE session is like a sprint within a marathon. And you know, when, you think about the idea of running a marathon and it frightens me to death. You're not never going to do that. But if you're, if you're five miles into a 26 mile run and somebody says sprint, it's, know, you need some breath from somewhere. And that's what it's like being P backed, but that is getting a business to the standard of product, profit production that makes sense for people who are investing real money. And the reason that people don't get P back is because they're not good enough. Right. And then not good enough comes from profits. So you say half the profit is missing. where does that number come from? And how come it's missing as well? Why don't founders see it? Because it's hidden. ⁓ It's hidden in the way they've structured their business. It's hidden because the business intelligence that comes from the data is hidden to them because they are effectively using a management accountant to provide them with that intelligence. And a management accountant is trained in recording and compliance. And they get quite good at understanding that you need to generate revenue. So they support that kind of activity. They then look at controlling cost and managing cash. So looking backwards, worrying about sales, managing cost, managing cash. All of the profit drivers live in the operation. They don't look in the operation at all. That's not their domain. If you take a large company, they usually only need one person to deliver the same output that a mid-size company needs three people to produce. And that's where the profit is lost. And the thing that people need to do is get better at generating output from their resources. So they're only getting about a third of the bang for their payroll buck. And they could be getting more. Easily Easily double. So you draw the PE comparison. So in an underperforming company with a leader that's not performing, what happens to the leader? How does a PE company help develop that leader or not? They don't. They don't. It's a sprint. Right. If they're not able to catch their breath and keep up, they put somebody else in who can. Right. It's brutal. It is brutal. But in a founder based company, what happens? A founder based company, they drift along at the same rate they have continuing to learn from their own mistakes and accepting. accept that, you know, 5 % growth is good. It's not, you know, if you want to double every five years, you need just over 15 % a year to compound. Actually, that's okay. ⁓ But really you want to be growing at 25, 30, 35 % a year compounded to keep up with the best companies. And if you compound that over 10 years, both in terms of growth and in terms of productivity, you get to somewhere near a hundred times difference in the value of the company. that again, so I can actually register that. you compound. Yeah. that higher growth rate of 25 to 30 percent and you and you double the productivity rate compound that over 10 years you'll get a different multiple on the value of the company and you'll be up worth 100 times more than the ones that just drift along and the ones that just drift along are worth what about 10 percent more do we say we're looking at the growth difference when we have 125 times more over that period you're looking at what you would be able to sell the company for. You probably couldn't sell the first company very easily. It would take you months and months and months to find somebody willing to buy it. You would get a multiple probably of three to five times. But it's off a smaller base. ⁓ If you compound that additional growth over 10 years, you're going to be very much bigger and you're going to get a multiple maybe 15 or 20 times. Wow. Wow. So by the time you've done the maths on all of that, the difference between drifting along and hiring people better than you and investing in your own development rather than the business development has a massive difference. on the enterprise value at the end. So those are things that need to happen behind the scenes, aren't they? Those you need to be... It's called leadership. It's called leadership. And it's not just developing yourself, it's developing the people slash replacing the people behind. So behind the scene. But most founders think they've got a board, but they don't necessarily have a board, they? Because they've got... Founders create a comfortable situation. They hire people who they can manage easily. They rather enjoy being the person who has all the answers, the smartest person in the room. And they are only ever meeting other business owners who have a smaller business than they have. So where they've come from. What they need to do is to be meeting people who run businesses where they want to go to and hiring new talent. from those businesses to help their existing talent understand what good looks like. And as a CEO of a mid-sized company who has grown their company, you know, 10%, et cetera, every year, and is quite happy with the growth that they've got, the 5 % profit every year of growth, but they know that they are lacking development. How do I, as a CEO, find someone who's going to hold me accountable or develop me. It's tough. again, if I go back to big companies, they give people appraisals every six months. Somebody sits you down and makes you look in the mirror and understand who you are, but then talks about your development needs and what you could and should do to learn the things that you're weak at and need to understand better. There's nobody doing that for a founder. chief executive unless they hire somebody to be a mentor or a coach. But they need somebody who they really respect and will listen to and will take, you know, the hard truth from. And who's done it before. Yeah, of course. And there are an awful lot of coaches out there who have never run a business as big as the one that their mentee is running. you need to find one who's actually been out there and done it. Yeah, absolutely. And so for somebody who's listening to this episode ⁓ and knows that they need to grow themselves and the company, what's the first thing that they should do? What's the question they should be asking themselves now? Well, The thing that I do coming into a mid-sized company for the first time is ask the question, what is this business trying to hide from me? Okay. It's not anything malicious. It's not anything that anybody is deliberately trying to hide. It's just the way it's been designed. Right. So there is lots of data. It's kept meticulously. There's lots of security around the data. people are producing lots of charts and dashboards, all about the wrong numbers. Nobody is analyzing the business and identifying what things do we need to do to drive the performance of this business from where it is today to twice as good by the end of the year. So the question that they need to ask is, is hidden in the numbers or the strategy or the documents, it's like you've got to strip it right back to what are we trying to achieve here? Well, if I walk into a typical mid-size company turning over 20 million and generating about, I don't know, half a million in profit and growing at about 5%, there'll be a lot of smug, self-satisfied people sitting around the board table doing, aren't we doing a good job? Right. No, you're not. Think about what you would have thought about that similar performance five years before when you were really growing at 15, 20, 25 % a year and were driving your profits upwards. It's all slacked off because people have run out of ideas. They've run out of experience and they think this is what it's like at this stage and it doesn't have to be. The best thing somebody can do when they reach the plateau of profit and lethargy and creation or creativity is to call someone in. Well, the first thing to do is to go and find some friends who are doing what you want to do. So go and find some people. If you're at 20 million, go and find two or three people who run businesses at 50 million. Right. and copy them, have lunch with them, have a beer with them, go and play golf with them and ask them how they got from 20 to 50. What mistakes did you make? What would you do differently? How do you get there? How do you overcome the difficulty? Because frankly, they're at ⁓ a ceiling, their growth is being restricted, not by the market, but by the team and the thinking within it. And if you have everybody telling you what a great job you're doing and that 5 % is good, before long, you start to believe it's good. Even though in your gut, you're thinking we could do better. You've got no evidence to support that gut feeling. And what you need to do is go and find the evidence to back your gut feeling. Yeah. And as you get further and further up the pyramid of ⁓ profitability and turnover, the people become less and less, don't they? That you can actually find. They do. But let me name the real culprit. Please do. the real. The real culprit in this is usually the person you have called finance director. The person who you listen to most closely, trust the most. Yeah. Because they get nearly everything right. The one thing they're not getting right is understanding what the potential is and what good looks like because they've never seen it. Well, because they, again, they're not developed. The FD that you probably got is an accountant probably. They'll be a management accountant. They'll be, you know, very good management accountants. They are the people who enabled you to get from, I don't know, probably two million to 10 million really well, because they had all of the skills that you needed to help you through that period, but they don't have the skills to take you on to the next stage. So it's a bit brutal, isn't it? You look at yourself and you look at who you've got around you and then. And it's not that they don't have the potential. Okay. They've not been trained. They've not been developed. If you want a really good chief financial officer, finance director, having a chartered management accountant gives you about a quarter of the skills. They don't have skills in business analysis. They don't have skills in data science. They don't have skills in economic analysis. They don't have skills in planning. Those are all missing. What they have is that really solid ⁓ accounting base that keeps the records straight. Does the tax compliance, minimizes your tax bill, make sure your cash stays on track. All of those things are vital, but it's only about of what you need. absolutely. And in the post that you did about this, about scapegoat or culprit, you did actually say, you you might have to replace yourself as well. Well, if you are looking at your business purely as an investor and looking at the asset that you've got, the way to maximise the value of that asset is to have a really good chief executive. There are two routes to go. develop yourself quickly or hire someone else in to do the job and you become the chairman. And you free up the time to be able to go out and explore all the ideas that you can hold your chief executive accountable to. Unfortunately, there's nobody holding you to account, yet it's your money and you know it's a problem because nobody is willing to invest alongside you. Tough lesson though, isn't it? It's tough. It's a tough call. Yeah. It is hard. Is there anything else on this particular subject that we haven't covered? Look, we could go on forever about where these things come from. But the missing skills are not only with the finance area, they're also missing in the marketing area. So people in mid-sized businesses... understand marketing to be the kind of fluffy front end bit. And it's probably all digital and promotion. But the core marketing skills are missing. Which are? What we used to call product management. So it's understanding the customer properly, understanding both their need, which nobody buys to, and their want, which they do buy to. making a product that they want to buy, design so that it's profitable for you to deliver, and then understanding the processes that improve the productivity and profitability of delivering that product or service, and then working out how to promote it. The only bit you've got is the promoting it bit without actually getting right what it is that you're promoting. So it's literally Roll your sleeves up, have a look at your board, see what's going on. It is. Well, thank you, Tim. Welcome.