Latest / The Start, Scale & Succeed Podcast / Why Organizations Become Less Profitable As They Grow with Nick Avaria (stage 4) - Ep. 399

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Why Organizations Become Less Profitable As They Grow with Nick Avaria (stage 4) - Ep. 399 · The Start, Scale & Succeed Podcast

• 0:00
  Scott Ritzheimer: Hello, hello, and welcome. Welcome once again
• 0:03
  to the Start, Scale, and Succeed podcast, the only podcast that
• 0:06
  grows with you through all seven stages of your journey as a
• 0:09
  founder. I'm your host, Scott Retzheimer, and we have got to
• 0:13
  talk today about the gut punch that nobody warns you about.
• 0:18
  It's that moment that your business becomes so successful
• 0:21
  that your profit margins start going backwards. Yes, you heard
• 0:25
  me right. You get so big that your profit starts going
• 0:28
  backwards. It's a total head scratcher, because you've done
• 0:31
  the right things. You've hired managers, you've added people to
• 0:35
  your org chart, you've got your team selling more than ever,
• 0:40
  revenues typically going up, setting records either year in
• 0:44
  and year out, or even month in and month out. Yet, despite all
• 0:47
  this, and despite the fact that you're working harder than ever,
• 0:51
  you're making less and less, and most founders blame sales or
• 0:55
  staffing or something else, but the real problem is usually
• 0:59
  buried in your operations, and most owners can't see it because
• 1:04
  they've never had the right system to diagnose it. Well, my
• 1:07
  guest today has built that system. He's bought, sold,
• 1:10
  scaled, and all the other things - seven agencies along the way.
• 1:15
  Nick is here with us today. Nick is a serial agency owner and
• 1:19
  strategist who scaled market multiple marketing agencies
• 1:23
  beyond seven and eight figures. He's bought and sold seven firms
• 1:27
  and built a system that's helped countless agency owners finally
• 1:30
  get their time and sanity back, all while growing profit
• 1:35
  significantly. Nick's not just another consultant, he's still
• 1:39
  in the trenches. He owns two agencies that run without him,
• 1:43
  giving less than four hours of his time per week, and he's also
• 1:46
  on a mission to help 100 agencies scale to $10 million or
• 1:49
  hit 1 million in profit annually, while building
• 1:52
  workplaces where people thrive. He's here with us today, Nick.
• 1:56
  As we were getting ready for this episode, we were
• 1:59
  commiserating around the challenges of this, this stage
• 2:02
  four for business owners, and you call it the missing middle.
• 2:06
  Why is that?
• 2:07
  Nick Avaria: The missing middle is basically the things that you
• 2:10
  know, mean to put in a bit of a cliche, what gets you from point
• 2:14
  A to point B doesn't get you to point B to C, and like so forth
• 2:17
  and so on. So the problem is, and like I think you said in
• 2:20
  your intro very well, is that you've done the right things,
• 2:24
  and now you are rewarded with more problems, and you know,
• 2:28
  like, I hate to be the bearer of bad news, if anybody thinks
• 2:31
  differently, but your reward for fixing problems in business is
• 2:35
  growth, and growth rewards you with more problems forever, so
• 2:41
  you never outgrow this, right? You, the problems just change,
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  and the team that comes along with you changes, and there's
• 2:50
  going to be parts that maybe you like in certain parts, like in
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  certain areas, like where you could make all the calls
• 2:56
  unilaterally, versus like now having a team and relying on
• 2:58
  them, but the constant is problems, no matter which way
• 3:02
  you really look at it, and the missing middle really is the
• 3:05
  fact that you made the right calls when you were, you know, a
• 3:08
  founder entrepreneur, you were the only manager for a while,
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  maybe you had like a second in command or something like that,
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  but now you're building these middle management systems, or
• 3:17
  the middle management layer, if you will, and all the things
• 3:20
  that made you successful, and all that vision and culture that
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  you were able to directly inject into your frontline employees is
• 3:28
  now gone, and that's a really tough transition.
• 3:32
  Scott Ritzheimer: Folks watching this in particular at a
• 3:34
  disadvantage, because I know at least I'm cursed with looking
• 3:38
  like a 22 year old still, and they're probably like these guys
• 3:41
  are too young to like it can't be that bad. How do they know?
• 3:47
  But you've done this, it's not like this is something that
• 3:49
  you've made up or read in a book somewhere. You've been through
• 3:52
  this multiple times. When was the first time you recognized,
• 3:55
  oh, this is something that actually happened, as opposed to
• 3:58
  feeling like just the world was falling apart.
• 4:01
  Nick Avaria: Yeah, I mean, like, for one, it happened to me
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  various times, like personally, and also like just in working
• 4:09
  with others, like in the sense of when we were looking to
• 4:13
  acquire agencies, right, especially like very early on,
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  and I'm going back more than 10 years now to date myself a bit,
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  but 1015 years ago the problems that we were seeing when we
• 4:25
  were, you know, writing LOIs, like letters of intent, and like
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  taking a look under the hood and seeing what was what, we just
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  saw this problem over and over and over again, because people
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  were like, I've thrown the kitchen sink at it, it's like
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  me, my co-founder, me, like second in command, like we've
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  gotten this business like 1520 people, or whatever, like you
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  know, couple million bucks, and we've tried to grow. We once
• 4:48
  grew to 3035 people, and it's almost like it chewed us up and
• 4:52
  like spit us out, and now we're back at, you know, 15 to 20
• 4:56
  people again, and we've done this like over the last like
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  seven years. We've tried to go, and we get to like 3035 and then
• 5:02
  we shrink back down. It's like, yeah, like that's exactly what
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  I'm talking about. There's like this chasm where you either
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  complete the missing middle and get to the other side more
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  profitable than ever before, meaning like similar profits
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  when you're super lean, like in terms of percentage points, but
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  now you're like three times as big on the top line, so you
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  either make it to the other side or the missing middle, like
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  quite frankly, it's kind of like a chasm, it chews you up and
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  spits you back out and puts you right back where you started,
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  except that now you've successfully wasted a ton of
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  money and probably around like 18 to 24 months of your time
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  just giving it a go, and then you're gonna have to reset for
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  another 12 to 18 months, and then basically like preparing
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  for the journey once again through this chasm, and either
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  you're going to make it the next time or not, and a lot of
• 5:47
  people, frankly, never make it, and it's not just my opinion on
• 5:51
  this, the numbers suggest it, right, because the number of
• 5:53
  firms that reach a million dollars versus the number of
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  firms that reach 10 million, the numbers kind of tell themselves,
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  so like they're,
• 6:00
  Scott Ritzheimer: yeah,
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  Nick Avaria: they're the success rate on a million bucks per
• 6:02
  year, which I mean is a great accomplishment. Don't get me
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  wrong, it's good. It's something like five to 10% depending on
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  what industry you're in, right? But the success rate of 10
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  million is like point 3% so it's three out of 10,003 out of
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  10,000 people, I think, is like the actual number, so it's a
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  massive, massive chasm that you actually need to cross, and very
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  few people actually make it. Yeah, so what I look at this as
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  is the data need delivery. You've done really good things
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  there, you've built up a client base, you've built out like a
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  service-based, loyal customers, whatever type business you're
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  in, you've built that, and the delivery is good, meaning like
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  there's some word of mouth there, there's good reputation
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  happening, good things are happening. Then you say to
• 6:49
  yourself, like, great, this is too much from your manager, let
• 6:52
  me bring in some managers, and I'm just going to focus on the
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  strategy and planning, I'll put out fires as needed, et cetera,
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  et cetera. The problem is, is that I think a lot of
• 7:01
  entrepreneurs are entrepreneurs and founders, they're not
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  necessarily CEOs quite yet. So, like, I can get into that a bit
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  later, more deeply, but they're not CEOs, and they haven't made
• 7:12
  the transition to CEO. They're founders, and number two, they
• 7:18
  were managing the business by feel, so for example, like,
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  you're going in, you're like, you kind of know when things are
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  going wrong instinctively, because the business has grown
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  organically around you as this founder, and when you detach
• 7:30
  yourself from the front line by instituting middle management,
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  that feel is gone, and you can't actually predict things before
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  they happen the way that you did, because you don't have
• 7:41
  proper data systems in place, right? So, the data you need to
• 7:45
  understand how to actually operate the business, what is
• 7:47
  day in danger before it's actually in danger, like things
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  that predictively can tell you what's going wrong aren't there.
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  And number two, before you were just amending the behavior of
• 7:58
  the people around you by giving them feedback, and when you saw
• 8:01
  the right behavior, or like that, that's the thing. Keep
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  doing that thing. Now you don't have direct access to those
• 8:07
  behaviors, and you haven't built any behavior change systems to
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  enable your managers to actually amend the behavior of others.
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  So, just because you can amend the behaviors of others doesn't
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  mean that the person below you, who's now a middle manager, can
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  do the same, and so those two are the primary things that are
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  missing, but it's beyond that, like the problem is, is that
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  generally the first managers in a business are not actually
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  managers, they are individual contributors that you have
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  promoted to a management role, because they're good at doing
• 8:38
  the frontline things, but here's the problem, in small business,
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  around 65% of managers are negative, meaning they are of
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  negative value to the business, and then there's probably like
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  another 10 to 15 that are neutral, and it's all because we
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  are placing technical experts in management roles, and what we
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  don't understand, because, like, I think a lot of founders are
• 9:00
  very humble. Is that we teach people how to succeed in the
• 9:06
  business, meaning like how to set expectations, like what
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  actually drives results, how to do time management properly, how
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  to work well with others, how to hit objectives, how to
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  prioritize, how to align with culture. None of these things
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  that I just mentioned have anything to do with the
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  technical skill required to deliver whatever product or
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  services, so in my head a manager's role is 30% take care
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  of the technical stuff, teach the technical delivery items,
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  and 70% is teaching people how to perform, and when we promote
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  somebody who is a doer into a manager role. What do we get? We
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  get the 30% technical, but the 70% performance is nowhere to be
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  found.
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  Scott Ritzheimer: Yeah, it's so fascinating. We didn't talk
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  about this ahead of time, but there are three different levels
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  that happen here. There's this level three reluctant manager.
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  Which most of these folks have been through. There's level
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  four, I call it the disillusioned leader, which is
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  this kind of messy middle that you're talking about. And then
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  the fifth stage is CEO, exactly like you said, they are not CEOs
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  yet, same language, there's fascinating, but the thing about
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  what you learn in level three, and you get past that reluctance
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  as a manager is to get great players, right? And then who do
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  we keep the best players closest to us? We move up a level, but
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  they don't necessarily move up with us.
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  Nick Avaria: That's exactly,
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  Scott Ritzheimer: and yeah, and it's just.. it's yeah, it's
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  stunning. So,
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  Nick Avaria: here's the problem. Like, I think that it's like,
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  look, if it's not my problem as CEO, I can't control it. So,
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  like, it would be really easy to sit here and say like these
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  people let me down, it's because of them that I'm not succeeding.
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  However, that makes us feel good, but it doesn't get us the
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  results that we actually want. So we have to figure out how
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  it's our fault to be able to actually take control the
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  situation and make it better moving forward, and so this is
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  where I think that, yes, we have potentially promoted the wrong
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  people, but I know for a fact we haven't given them the right
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  systems to succeed. So, yes, did hire the right people, would
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  they succeed where these people have failed? And so, the
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  question that I get all the time is, like, how do I know if my
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  actual middle management team, or even my senior leadership
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  team is the problem, or my systems are the problem, like
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  there's only one way to find out, unless it's like glaringly
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  obvious qualitatively, because like these people are nightmares
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  culturally, which is like a different problem, but if you
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  put the systems in place and they can take ownership over
• 11:37
  said systems, and like basically like shepherd the rest of the
• 11:40
  company through these systems, they're not the problem. It was
• 11:44
  the systems, now the systems are in place. We're good to go.
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  People turn around on a dime, but if it's the people, even
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  with the systems, they're still going to fail. Like, how far is
• 11:54
  far enough to get these things into place?
• 11:57
  Scott Ritzheimer: Yeah, and it's just, and it's work, it's real
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  work, it's hard work, it's people work, it's messy, it's
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  challenging. You've, you touched on this a little bit, and I've
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  got another question that I want to ask for you, but before I go
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  there, I really want to give you a moment, because, like, you've
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  done this, and you've been to the other side a few times, and
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  I think one of the things that we lose when we're in the middle
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  of all of this. Muck is a vision for the fact that it can
• 12:24
  actually be better. So, what is on the other side of this? If we
• 12:28
  can develop that management layer, if we can teach folks to
• 12:31
  be good managers, if we can step into that CEO stage, why is that
• 12:36
  worth it?
• 12:37
  Nick Avaria: Well, I mean, like it's worth it if you like that,
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  and like, look, I'll put it to you this way. I am horrible at
• 12:47
  starting new businesses, like I am, like I am not a natural
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  salesperson. So, like, I've great difficulty getting
• 12:55
  businesses to a million dollars in revenue. I am very good at
• 12:59
  transitioning companies from one to 2 million into 10, that's
• 13:02
  like actually my sweet spot. After 10, I don't like the
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  politics that happened, blah blah blah blah blah, et cetera.
• 13:09
  I know other people should run these businesses for me, right?
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  So, like, first of all, you got to get clear on like what you
• 13:14
  are good at, and then fill the gap in between. So, you have to
• 13:17
  have a clear vision, not only for the business, but firstly
• 13:20
  yourself, so that you understand where you can provide value to
• 13:23
  it or not, right. And what I tell people is, like, first you
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  need to make this clear vision. Step two is what numbers after
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  the vision is clear. What are the numbers that make the vision
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  possible, that make it real? And then what are the behaviors from
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  the organization and specific individuals, not just ordinary
• 13:43
  organization itself, but also the individuals inside of it.
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  What behaviors are needed to make the numbers real, right?
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  And then what is the current reality versus the current
• 13:56
  difference to those behaviors? So, like, we have our behaviors
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  today, what our behaviors should look like in order to hit those
• 14:02
  numbers, and what those numbers are to hit the vision, and
• 14:05
  ultimately, how we get the behaviors is how do we build new
• 14:09
  habits inside of each and every single person within the
• 14:12
  business to be able to like make the whole thing go. So breaking
• 14:15
  it down, high level vision is clear, numbers to make it real
• 14:19
  is clear, what behaviors we need to make the numbers real. What
• 14:22
  is the difference between current state behaviors and
• 14:25
  future state behaviors? And then basically rank ordering the
• 14:29
  habits in order to build those behaviors, like that is how you
• 14:32
  make it real. And like, to me, a vision people are like, oh, you
• 14:35
  know, like to quote, like Microsoft's like old one, it's
• 14:37
  like, you know, a laptop on every desk, it's like, okay,
• 14:41
  great. What numbers make that real? It's like, well, they
• 14:44
  could quantify that, right? And then it's like, okay, well, what
• 14:47
  do we need to be able to do to do that? And like, I don't think
• 14:49
  people go far enough on the vision. To me, the vision isn't
• 14:52
  just, hey, like, we're going to expand across North America,
• 14:56
  like that's not a vision, it's what backs that up.
• 15:00
  Scott Ritzheimer: Yeah, yeah, so good, so good, having the goals
• 15:04
  along the way as well. Nick, there's a question before I let
• 15:07
  you go here that I have to ask, and the question is this: What
• 15:11
  is the biggest secret you wish wasn't a secret at all? What's
• 15:14
  that one thing you wish everybody watching or listening
• 15:17
  today knew?
• 15:18
  Nick Avaria: I think the biggest secret is, is that good leaders
• 15:21
  only follow strong leaders. So, the problem I've seen this
• 15:25
  happen a lot. It's happened with me previously, like, like a
• 15:29
  decade plus ago. You know, I couldn't attract top talent
• 15:34
  until I became a really, really strong leader. Like, you're not
• 15:38
  going to hire other leaders in your business that are that are
• 15:43
  going to be stronger than you yourself as a leader, so you are
• 15:46
  the ultimate speed limit of the business, and the most important
• 15:50
  thing to be able to attract good leaders is making the transition
• 15:54
  from founder to CEO, because good leaders work for CEOs, they
• 15:58
  don't work for founders.
• 16:00
  Scott Ritzheimer: Yeah, yeah, yeah, Nick, we could turn this
• 16:04
  into a very long conversation. I've got about 19 different
• 16:07
  things that we could talk about, but to stay true to our
• 16:11
  commitment to keep these nice and short and sweet for our
• 16:14
  guests, I've got one more question for you, and it's an
• 16:16
  easy one. If folks want to find out more, where can they reach
• 16:19
  out to you? How can they find out more about the work you all
• 16:22
  do?
• 16:22
  Nick Avaria: You can find me on LinkedIn at Nick Averia, that's
• 16:24
  N I C K space A V A R I A, or you can look me up on Agency
• 16:30
  acquisitions.io
• 16:33
  Scott Ritzheimer: Fantastic, fantastic! We'll get both of
• 16:36
  those in the show notes for you all, so you can get right to
• 16:38
  them. Highly recommend it, Nick. Thank you so much for being on
• 16:42
  the show today. Really was a privilege and honor having you
• 16:45
  here. Fantastic conversation, and love the way that you
• 16:49
  approach it. For those of you watching and listening, you know
• 16:51
  that your time and attention mean the world to us. I hope you
• 16:54
  got as much out of this conversation as I know I did,
• 16:57
  and I cannot wait to see you next time. Take care.