There are two (maybe three) types of small business.
The first type of business (owner operated) is what happens when someone who is really good (the expert) at doing something (or someone who really wants to do something because it’s a hobby or passion) starts a business built around that capability. If you are a great plumber, you may get into the plumbing business. If you are a good lawyer you may open up your own practice. If you are good at fixing computers, you can start up a computer repair business. If you love dogs you may start a dog day care business even though you are not yet an expert.
Owner operated businesses have some common characteristics:
- The business is built around the skills of a few people. Sure there may be quite a few other people hired over the years, but if the top practitioners leave, the business generally fails unless someone with suitable skills and relationships takes over.
- The owner works in the business (and not enough on the business).
- A large part of the business owner’s day goes into finding customers, keeping customers happy or delivering the service to customers.
- Often the roles not core to delivering the actual product or service are considered secondary or a necessary evil rather than core to business success.
- The business is an excuse for the person(s) to do what they like, deliver the service or product to customers.
Some owner operated businesses are very profitable and some are not. However, at the end of the day, they can be tricky to sell or exit because too many things are tied to the owner. Really it’s mostly a job: sometimes really a good job; sometimes not as good a job as envisioned; or sometimes a downright horrible job (think working 12 hours a day, seven days a week with no vacations, forever).
A subset of the first type of business is the independent consultant who incorporates for tax or legal reasons but really has no intention of building a full fledged business or hiring others. Let’s face it… this is another name for a contract employee… a job of another sort.
So that brings us to the second type of business… the entrepreneurial business or owner directed business.
The owner directed business goes smoothest if started that way from the get go (but it can also evolve from an owner operated business). At first it can seem deceptively similar to an owner operated business.
The owner is initially involved in all (or many) aspects of running the business. But an entrepreneur is only doing this as a stage in the business development to master the skill, build a repeatable system around delivering the skill, and then hand it off to someone else (employee or outsourced) for repetition. The entrepreneur’s “job” is building the business and they never lose sight of this (or at least don’t get distracted often) goal.
They are driven by a dream or vision of what is being built and it’s much bigger than they are. They know the only way to succeed is to build a system of systems (a business) that will help them achieve this goal. Something that will rely on no one person or entity for its ongoing success is the ultimate goal. Even the entrepreneur will no longer be required (desired maybe but not required).
You don’t have to actually sell the venture, but it has to be capable of being sold for its full value because it:
- Does not require the owner to continue delivering the value (customer, shareholder, etc.)
- Covers all essential business functions in a repeatable, systematic fashion.
- The talent pool for all functions is large and all roles can be filled with training and experience.
- Delivers value on shareholder investment (profits/growth).
- Delivers consistent and predictable results (you can count on this in the future).
At this point you may have a mature owner directed business.
Some mature owner directed businesses will remain entrepreneurial and continue to grow and improve, standing the test of time. And some will eventually focus on yesterday’s success and over time shrink and fade away. The foundations that are built into the business today (don’t forget leadership selection and promotion as part of the system) will impact the long term results.
Look at Apple with the return of Steve Jobs for a strong example of dependencies on a person and the legacy left to General Electric by Jack Welch for an example of a systematic business including leadership selection and development.