When you are an entrepreneur, you
want nothing more than to see “your baby” grow up into a successful business,
especially with all the headwinds that are sure to come your way. That often means that those same
entrepreneurs are willing to make sacrifices, veering off on tangents away from
their stated business plan. I am not
talking about business pivots in a new direction, that would ultimately require
an update to the business plan. I am
talking about keeping the same business plan, but making exceptions to the
stated goals, just to make some progress with the business. That is when you can get into a lot of
trouble. This post will help you learn
how to avoid getting trapped in those rabbit holes.
A Case Study
I recently met an entrepreneur
building a restaurant chain. She had
opened four locations in North Carolina.
The first location was a home run, built exactly to plan and was generating
a lot of revenues and cash flow. That
encouraged her to start rolling out new locations. But she was having a hard time finding
locations with the same rental costs or prime locations as the first location. So, she started making sacrifices, to keep
the business growing. And that is when
she started to get into a lot of trouble.
The second location did not have
an optimal floor plan. In fact, it was a
two-story location, with half the seating on the first floor and the other half
of seating on the second floor. Instead
of having a wide open fun environment, the space was too chopped up, and had a
completely different vibe. As you can
imagine, people did not like the experience and did not return, creating the
stress of having to make a profit on her long term lease with limited revenues
to work with.
The third location was put in a
suburban location, as opposed to the city center. But the target demographic was young people
in their twenties, and the suburban location appealed more to families. Even though the rent was half of the price of
the downtown location, it just wasn’t attracting the right audience, and was
struggling to make a profit.
The fourth location was opened in
Raleigh, after the first three locations were opened in Charlotte. She was excited to be expanding her business
into new markets. But Raleigh isn’t like
Charlotte in terms of population density downtown. And even though the location
felt pretty similar to her first location in Charlotte, it only had about half
of the revenues, with the same costs.
And to make matters worse, the entrepreneur didn’t have any marketing
economics of scale with a single location in the market, and she was now forced
to drive 2.5 hours between the two cities trying to figure out how to improve
the Raleigh location’s results. Her
enthusiasm for growth had suddenly turned to frustration and desperation.
When I asked the entrepreneur how
she ended up in this position, I got a very interesting response—she said she
was following the advice of her investors who wanted her to test a second
market and her friends who wanted her to open up new locations near where they
lived. She said her “gut” was telling
her these locations were not right, but she opened them anyway, racing to grow. Now she is stuck with three long term leases
choking her cash flow like a noose around her neck.
The Key Learnings
Set a Clear Plan/Do Your
Homework First. The entrepreneur had
never created a clear site location strategy.
That was like a home builder trying to build a house without a
blueprint. She should have laid out
clear “rules of engagement” before opening any new location. That could have included a certain population
size within three miles, a certain demographic target nearby, a maximum of
2,500 square feet on a single floor, located on a busy intersection, with a minimum
number of locations per market, etc. So,
when she went to go find new locations, it had to check all of these boxes to
give it the best odds of success.
Stick to the Plan. Desire
for growth should never trump common business sense, in terms of her site
locations. The sacrifices she made, in
the spirit of growth, ultimately ended up creating terrible financial strains
for her business. In this case study,
she made sacrifices in floor plan, location and market, and each time it ended
up costing her. Now instead of spending
her time celebrating her successes and profitable growth, she is spending all
of her time cleaning up her old messes made, which wears on a person
psychologically and puts the financials in a negative light, making it
difficult to attract new capital needed open up the next locations. It is perfectly fine to say “no” and wait for
the perfect opportunity to present itself; don’t just jump on the first thing
you see for growth’s sake.
I am not saying you should never
make sacrifices; sometimes you have no choice (e.g., think about how different
store layouts are in Manhattan due to the lack of space, compared to those
chains’ other locations in other cities). But you can’t always be making
sacrifices, or you are going to end up in the same mess as this
entrepreneur.
Always Listen to Your Gut. As a CEO, you are the person with your hands
on the “steering wheel”. Only you can
make the business turn one direction or another. Don’t let the desires of others lead you in a
direction you would never have driven on your own. By not listening to her “gut”, that was like
handing the steering wheel to the person in the passenger seat and letting them
drive the business right off a cliff.
Closing Thoughts
Your actions as a CEO have
consequences. Don’t be in such a race to
grow, that you throw out your proven playbook and common sense in the
process. For if you repeatedly stray too
far from “ground zero” in your business plan, don’t be surprised when it
results in growing losses, an inability to attract additional growth capital
and a material increase in your general anxiety level. Growing is hard enough as it is; don’t
self-inflict any wounds that makes it any harder than it needs to be.
For future posts, please follow me on Twitter at: @georgedeeb.
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