The Valleys of Death Revisited

Valleys of death are where your business grows but your profits do not. We all have to go through these valleys or troughs!

Valley #1 appears between 0 and 10 staff (roughly). On your own you might make £100,000 and take home £99,000 after you’ve paid the taxman. As you add staff and overheads your profits collapse until you get to, say, 10 staff and a 10% net profit which is… drum roll… £100,000. Yes, an extra £1,000 for all the effort of employing 10 people.

“Is it worth it?” you ask yourself. Well yes, because beyond the 10 staff you start making some proper money. But only if you are happy to go through the pain of getting to the 10 staff!

Alas, the profitable days are not long-lived. Beyond roughly 15 staff you enter another Valley of Death but this time you don’t get out of the difficulties till at least 50 staff. Who said growing a business was easy.

So, what do you need to do to minimise the problems (inefficiencies or rapidly increasing overheads) associated with these growths in staff numbers? Or, if it is possible to predict these dips then how should we attempt to mitigate the downsides?

First, let’s understand why the dips happen.

At its simplest, small businesses ‘succeed’ because they are dependent on the owner not charging their full economic price yet delivering an awesome quality of service. This explains why profits crash as you start to employ people. Staff aren’t as committed (ie don’t work stupid hours) and they cost an economic wage. Remember the phrase, “What got us here won’t get us there.”

In the end, there is a levelling out as a consequence of the efficiencies of employing a limited support team (book-keeper, general manager, first salesperson). The problem can be measured as the ratio of fee-earner to admin/overhead people changes.

A similar although more critical pressure reoccurs as you break 20 staff. The needs of the business require a different business model and approach to management. Again, “What got us here, won’t get us there.”

While Valley of Death #1 is easily identifiable and explainable (you need to be more businesslike and stop seeing the business as a hobby), Valley #2 is an altogether more serious affair.

To bridge Valley #2 you need to have people in place to replace the entrepreneur. You need systems and processes to make sure that things happen the way you want them to. But, more importantly, your business model is fundamentally changed. Too small to be big and too big to be small, you can no longer depend on the cheap and hard-working mantra of the small business yet you don’t have the deep-voiced depth, brand and reputation of one of the Big Boys. Stuck in the middle the temptation is to compete on price which is a mug’s game.

So, what can you do, stuck in the middle?

Recognising the journey and the pressures it puts on your business is step one. Understanding what lies ahead allows you to plan and predict what will happen next. Ignoring these pressures or trying to play the game with the toolkit and mindset of a smaller business may well end in a slow and painful death.

So, what do the great businesses do to escape the trap of the Valley? The successful focus on:

·        Strategy – where are we going? What business model do we need and how will it differ from the old one?

·        Marketing – why should people buy from us? How can we keep making those sales?

·        Teams – how do we get on? What are our values?

·        External input – have we brought in enough experience? Can we stop learning on the job?

·        Money – can we see how the growth needs to be financed? (probably in advance).