Crossing the 7 Figure Desert | Ep 16

Speaker A

00:00:00.720 - 00:26:44.690

This is episode 16 and I'm going to discuss the seven figure desert and why you need to deal with it even though nobody else ever talks about it. This is the Bottleneck Breakthrough podcast.

I'm Josh Long and this is all about helping you find and fix the biggest challenges in your business to unlock growth and profits that last. Hey hey. Welcome to the episode.

Excited to dig in with you today on interesting topic that I don't think enough people talk about for small business owners and it's primarily because most small businesses don't get to this level.

It's the what I call the seven figure desert and I'm going to go in depth on why I think it's a no man's land to be stuck in the 2 to 10 million dollar range and what what other things come up as I see businesses face it, but I know so many of you listening think have a goal of getting to a million dollars in revenue that that kind of seems like the holy grail that especially in the biz op info marketing space, the seven figure mark is kind of like the promised land that they pitch to small business owners because it seems like oh, then I'll, then I'll, then I'll have made it, then I'll have all the money I need and all my problems will go away and things will be easy once we hit a million dollars. It seems to be the kind of the consensus vibe out there.

But the reality is that things just start really getting interesting from my perspective once you hit a million dollars. And the reason it's such rare error is the number I've heard is about 7% of all businesses in America get get to a million dollars or more.

So it is definitely not the space that the typical mom and pop or the local retail shop or whatever gets to or even restaurants. Most restaurants can't even think of getting to a million dollars a year.

And so the amount of advice given for businesses over a million dollars is much less because there's just much less business out there doing it. And so guys in my spot tend to either gravitate one end or the other. They either deal with startups or wantrepreneurs or people that own a job.

Essentially a small business owner that fulfills and does everything and is kind of wearing all the hats and spinning all the plates or they gravitate to the high end of the hundred million plus companies that are fifty million plus companies that need some specialist to come in and do a specialist skill set. And so they talk a lot about strategy or Very specific, high level things that the typical small business owner has no concept of how to apply.

And so there's just not that many people serving that middle market of the 1 to $50 million range. And so I find that there's just lack of information.

And so a lot of companies, a lot of business owners get past that million dollar mark and it really becomes no man's land because there's not really anybody there to help them, guide them. They can't spend enough money to bring in a high level consultant. Usually they are tired of dealing with subject matter experts.

Whether it's a Facebook ads guru or an agency that does something or some trainer that says, oh, you have to set up all your systems and you got to document everything following like the Michael Gerber E Myth system. And so there's a lot of, or the EOS is the modern version of E Myth, the traction guys.

And so the problem is that it becomes kind of a hodgepodge of things at that point.

And the reason I call it a desert is because when you get to about $2 million, you can have a really well run business, a cash cow that can run mostly without you. It'll never run fully without you, I don't think at that size.

Unless it's certain industries that like a friend of mine had a dry goods brokerage, so he found many manufacturers and distributors that he could get specialty or blemed items and could handle those contracts well and then distribute them. And that kind of ran without him. He got his team running it, but those are rare to be that small in the 1 to 2 million range running without you.

But you can have a nice cash cow that maybe you're putting in five to ten hours a week and you can take a lot of vacation. And like a client of mine last year, she in 2019 went on 12 weeks of international vacation and they were right around that 2 million dollar mark.

And everything ran well without her there and they did great. And so you can do a really good job having a business of that size at that revenue point and have it run smoothly.

But once you go past that, the interesting thing is that once you get to the 3, 4, 5 million dollars range, really at 5 million, if you get stuck there, it really is like a form of purgatory.

And so to me, this range between 2 and 10 million, I call the seven figure desert because it's just you're stuck out in the wilderness, you don't know which way to go. And when you get to 5 million and you get stuck There you as the owner will be less fulfilled than when you're at 2 million.

And the reason is because up until about 2 million, you can kind of play whack a mole with the problems of the day.

They come at you, you can solve them, answer them, send them on their way, delegate them, whatever, but when you get to 5 million, the problems of the day get much, much larger. The moles are much larger and you can't just whack them away because the implications of those decisions are so much more complex.

So, for example, let's say that you've got a $5 million agency and a prospect comes in and they're large and they want some kind of exception.

And you can't just tell your sales rep, yeah, do whatever makes sense because that sales rep maybe agrees to some fulfillment, custom fulfillment, but your team is overwhelmed or you don't have that specialist anymore that might be able to step in and do that because maybe they went on maternity leave and you would have to step in to do that specialty consulting which you aren't thinking about because you just focused on getting everything dealt with that day. And so you say, go, solve it. And they go back and they say, yep, we can do that.

And then they go into fulfillment, the kickoff happens and that client is expecting this custom XYZ bespoke solution. And you realize, oh, crap, our person that handled this, she's gone. She would be able to do this perfectly. And she's on maternity leave.

Crap, now I gotta do it. And now you're like, where do I find five hours this week to apply to this specific bespoke thing for this new high level client?

And so they're your quick whack a mole. Yeah, just say yes, whatever, we'll get it done. Just close the deal just painted you into a corner and now you're trapped.

And I see this over and over and over in companies in that $5 million range.

And the problem is that once you are the bottleneck where you're having to answer all these challenging problems, challenging questions, and you don't have any other mid level managers that can do it, everybody gets stuck waiting on you.

And it comes from every front, every corner of the business and you then don't have any space to think about things because there's just this line of moles stacked up waiting to be whacked and you can't get to it because you've got all of the other things that keep you busy and stuff that you're trying to tackle. And so it becomes this stage of purgatory where you, you're just walking around in a version of hell every day, overwhelmed, not able to get past it.

And the irony is, I've had clients in the past where I got them to 5 million and then they're like, oh, we're done. I can't grow anymore.

Because they think to get to 10 million, they got to work twice as hard or they'll have twice as big of problems or twice as many staff that they have to manage directly.

And that's the catch 22 of, of business ownership and growth, is that you think you're going to work harder, but the reality is once you get to certain plateaus, things actually get easier. The problems become bigger or harder, but your actual workload or the amount of activity that you're handling can get easier if you set it up right.

And the key to setting it up right is to develop managers. And I think by the time you get to 5 million, you should have two, maybe three key managers that you've developed at a million.

Everybody needs some kind of operations manager, some kind of fulfillment director, somebody that's in charge of clients getting what they need. So that's your first manager.

And then by about 5 million, most companies need a marketing manager, somebody that's taking over the strategy and implementation of marketing.

They may not do all of the copywriting, they may not do all of the high level strategy, but you need somebody that's in charge of handling all the marketing problems that happen, marketing and sales related. So that way they're able to be that buffer.

They're able to deal with 95% of the problems that come up, and you're able to stay focused on the high level strategy, keep the company going in the right direction, keep the morale high, and keep driving growth forward. So that's operations and marketing. And some companies at that point would need somebody in charge of finances, like some kind of controller role.

You're not going to have a CFO at that level yet.

That's really premature usually to think of having a CFO type person, because that person's going to be more involved in negotiating with banks and rates and credit lines and figuring out all sorts of policies for your employee benefits and stuff that might be able to optimize. That's where a CFO comes in. And at 5 million, you might be at 30 staff, 40 staff, and that could seem like a lot right now.

But that CFO is going to be too much horsepower for a $5 million company that the CFO really comes in around 10 million.

But you've got to have somebody in charge of your finances that can get you the reports when you need on time, that you're not just dealing with a bookkeeper anymore, that they're able to negotiate some terms with vendors. Maybe it's payment terms or discount terms or things like that.

And when you get across that spectrum of operations, fulfillment, marketing and sales and then finance, then you're able to handle much more high level stuff. And those moles that are stacking up should be delegated to those managers to start solving. And of course you can back them up and support them.

Another area, depending on your business model, if you have a lot of staff turnover, maybe you deal with a lot of laborers or seasonal staff, then maybe there's a, an HR recruiting or onboarding or staffing manager that usually falls under the operations manager or the fulfillment manager.

But maybe you don't have the financial controller, but at that point you get an HR director that somebody that's just dealing with ads, dealing with recruiting, dealing with interviews and getting people onboarded because you've got a lot of staffing. So the seven figure desert really epitomizes this stage that I find companies in between 2 and 10 million, like I said.

And so once you get to 10 million, the interesting thing and the reason to get to 10 million beyond just the sanity is there's so much more that you can do with that company.

Now a friend of mine, he went through private equity, got a sold 80% of his company a year and a half ago and he talked to me about all of the private equity spaces out there and all the journey that he had gone through with his software company over the years.

And an interesting thing that he pointed out is there's a lot of private equity firms or investors that will pick up companies in the 2 to 3 million dollars range and they'll roll them up with a bunch of other companies that size and let's say they get eight of them together and their revenue is somewhere around 20 million and then they'll sell that firm for a lot more because they're all piled together and they bring some synergies together. But when his software company was in the 2 to 3 million dollar range, they were offered like 5 or 6 million for it.

And he said once he crossed 10 million the multiple went up more. So it's a compounding return for the owner. So you may be doing 2 million a year and you may be taking home let's say 250,000 a year, which is great.

But let's say you get offered the typical, if it's a regular basic business, three to four times net profit. So maybe you get offered a million bucks, but in his case he's a software company and let's say the multiple is three times gross revenue.

So he was offered somewhere in the five to six million dollars range back then.

And that's compelling and seems like a lot, but when you've got partners, you've got some debt or you don't know what else you do with that pile of cash, then growing further can make more sense. And so in his case they got past 10 million and now the multiple got in the five to six times gross revenue range.

So instead of two to three times gross revenue, now it's five to six times gross revenue. So double the multiple and then revenue, their revenue went up, let's say six fold since then.

So you've got double the revenue or double the multiple, double what you could be acquired for and six times the revenue. So now you're getting walking away with 12 plus times more money in your pocket. And that's exactly what they were able to do.

And so the reason to get across that seven figure desert is not just to reduce your headaches, which seems ironic because it's growing pains to get through that desert, but you'll actually have less headaches, less overall burden on your plate. But then your upside is multiplied, in this case 10 to 15 times.

So, and I got a client, they've got another, they're about two and a half million and they've got great margins. They were, they said this year they're tracking at 55% net profit, which is just insane.

So obviously investing in growth, they can justify it because they've got more money than their lifestyle justifies. But I reframed it for them that by getting to 10 to 20 million because they're not really money motivated and they've got a good cash cow right now.

So they can keep it if they want, but they can make more of an impact, they can affect more people, they're much in the personal development space and lives are improved from going through their training. And so that was a big motivator for them. But then it gets easier to manage and they could have more upside.

But another point too is when they have that kind of margin, it's inevitable until some competitor is going to come and eat their lunch.

Because all markets can start out inefficient, but once there's a surplus of capital going to a market, there's going to be competitors and there's going to be demand for them. And so either you grow and take over that market share or somebody else comes and does it for you.

So that's another reality when you're looking at something like that. And so Perry Marshall and I, when we do some of our year long training, one of the things we look at is are you in a star business?

Are you in a star industry? From Richard Koch's Star Principle book.

The definition of a star being that the industry is growing significantly and that you can be the leader in that industry. And so this client, they are definitely the star in their space.

And it really behooves them to grow into their potential and not just sit and try to be comfortable and try to turn this into a cash cow. Because I don't think the cash cow will sustain more than five years from now because the market is evolving so much in their space.

So Those are the three main reasons to grow from 2 million to 10 million are to increase your multiple, increase the amount of support you have and then really be able to make more of an impact if that's something that's meaningful to you. But there's plenty of companies and I've helped lots of them stay in the $1 to $2 million range and get it running like a top.

And so they can take as much time off as possible and have a great business that they extract as much cash from and turn into long term assets like real estate, rental properties and stuff.

Because that's the, the name of the game is converting short term income into long term assets so that you have some type of retirement or financial security. If we follow Kiyosaki's rich dad, poor dad examples that I think make the most simple case of how to build wealth and why to build wealth.

So as you look at your business and you think of gosh, if I could just get to the million dollar mark, then my problems will be solved. Well, the reality is no, they won't be solved. But thinking of what do I want to do once we get to the million dollar mark?

Do we want to just make it into a nice cash cow so I can go have a lot of hobbies or go invest in other things or put my money towards things that are more meaningful to me than maybe businesses? Or do we want to set ourselves up for scaled growth past the million dollar mark?

Because a lot of companies will start tapping out in that million to 2 million range if they don't have some perspective of the infrastructure needed and the change that the owner needs to go through to get to that $10 million mark. And you definitely don't want to set yourself up to grow to 5 million. I've never met an owner of a $5 million company who's happy.

And the only ones that are happy are the ones that only stay there for a year or two.

Once they get stuck there for more than two years, they're miserable and their revenue can bounce up and down, they can jump up to six, drop down to three within a year. I've seen that over and over and it's really no man's land in that seven figure desert.

So one thing that I want to put out there for anybody listening that might be in that spot, in that 2 to 1 to 5 million dollar range, that they're not sure how to get through it. I'm excited to work with companies in that spot.

And I've realized that a lot of times they come to me and want me to commit to some big long plan or give some detailed outline of how we're going to tackle it. And without being involved in the company, it's really hard.

I mean, even if I do a small assessment, kind of ask the staff, look at their numbers, look at their analytics, get an idea of where the low hanging fruit is. Even in an assessment, it's hard to understand really what it's going to take to grow this company.

And so what I've realized is that just doing a 90 day sprint out of the gate is the best way for us to figure out what the potential is.

And with that 90 day sprint focusing on adding 100 grand in new profit, because there's so many things in any company, there's so many ways to optimize them, so many inefficiencies that if I can come in and help increase revenue, new profit instantly, then a number of things happen. One, it pays for my fee. So everybody's happy and there's no longer any pressure on. Gosh, it's Josh.

Should we be paying Josh, should we keep him around, whatever.

So obviously that's a very selfish thing for me is by getting the client quick profit, it takes the pressure off of them and me of should they keep me around. The second thing is growth requires profit.

And so if you're at 2 million and we try a couple different things and in 90 days can't add that hundred grand in new profit, then there's probably something broken or wrong or something bigger that needs to be tackled.

Whether it's a culture thing, whether it's a staffing thing, Whether it's changing an offer, changing the target audience you're going after, whatever it is. And it's not to say that I'm lazy, it's not that I'm only looking for the lowest hanging fruit that I can pluck off and make money off of.

But there's real issues in businesses and I think by doing a 90 day sprint focused on extracting an extra hundred grand in profit, it helps us see if there's a reason to continue.

It helps me develop an idea of gosh, they really do just need a couple things tweaked here and there and this can be really a great growth and we can really get them to 10 million or gosh, they've got cancer and here's my diagnosis and how to fix it. But there's no way for them to pay me enough to stick around to try to fix all of it again.

It's not that I'm heartless or don't want to help, it's just the amount of time I have as a solo practitioner. And being able to come in and try to fix broken companies is not something that I'm interested in.

Maybe if I was at the Fortune 500 level and they were doing a billion dollars in revenue and I could fix them and get them to 5 billion, then it'd be worth the two or three years to turn it around.

But for a company that's in the 1 to 3 to 4 or 5 million dollar range and they've got some major issue and it takes two years to fix it, there's just not enough payoff for either of us in it for me to be involved in fixing that.

But I think the 90 day sprint focused on adding 100 grand in new profit is turning out to be really a great happy medium because that's able to reduce the risk of our involvement. So you're not having to sign a big contract and say a year long commitment.

I'm able to get in and look under the hood and then at the end of the day, if we add the 100 grand in revenue, we all win, we make money, we move forward and we get to decide do we even like working with each other. So I'm excited to keep leaning into that space with business owners because it's, it seems to be a good fit.

So if you are listening to this or you know somebody that should be listening to this and they're in that seven figure desert and they're frustrated and you all know that their business has so much more potential and can help so many more people and make such an impact and create great jobs and all that have them reach out to me.

You can go to my website, bottleneckbreakthrough.com and there's a section there on work with Josh and you can just fill out that form and gets the conversation started. But I think that helping small businesses in that seven figure desert get unlocked and get moving forward really is my sweet spot.

After all these years of doing consulting and after writing the book and having the case studies and realizing that who I work best with is really those business owners that are in the 2 to 5 million dollar range that realize they have a great company but they're just not sure what what to do next. And the uncertainty abounds. And there's just no other resource out there for companies in that space.

I've been looking for it, I've been trying to find it, I've been trying to point people to it, but it seems like bottleneck breakthrough is the only thing out there helping companies in that space. So I'm happy to provide it and happy to work with them.

So I'm excited to see how this helps and I'd love your feedback as you hear about this seven figure desert and as you see yourself or others get caught in it. Keep giving me feedback on whether that resonates or if I'm missing something or if I'm minimizing it too much or whatever.

But I'm excited to see how this continues to unfold to help those companies transition that gap and become real significant influencers in their space and big players in their industry that keep helping more and more people.

Because I think there's a lot of companies that get to the million dollar mark that have great potential, but they just don't have the support or the resources to really crack through that next level and get past 10 million where the blue sky or the blue ocean, opportunities really abound. So I think that I'm going to leave it at that. There's so many other thoughts or ideas I have right now, but I'll just save it for another episode.

And hope as we head into the Christmas season this year of 2020 that you're able to have some great time with friends and family and be together despite all the crazy lockdowns and rules that our governors and leaders are trying to impose on us, that you're able to reflect on a year and find the thread of positivity and joy and celebrate your relationships. Because I think that's what life's about.

And all that matters to me is being around people I love and encouraging each other and spending time having fun and making the most of it. So have a wonderful Christmas and I'll look forward to hearing your feedback. Take care.

This podcast theme music is an excerpt from triptych of snippets by Septah Helix. It's used under Creative Commons.