Growing your distribution company from $25 to $100 million/year can be as rewarding for an entrepreneurial leader as establishing the business in the first place. As the presidents of the businesses that hover year after year around the same volume will attest, making the transition from a large small company to a midsize enterprise is the greatest challenge a leader can face. Why is growing from $25 to $100 million/year so difficult and what must an owner be willing to do to succeed in the journey?
Manage the Extended Gap Between Generations
It takes several years to grow a business so the founder will be in his 50s or 60s by the time the company has a major hub with several branches. He needs to know that someone else he can trust will care, follow through, and have the energy to do much of the hard work that is needed to establish more branches, invest in a second hub, and/or expand product lines.
Since over 90% of businesses view themselves as “family owned,” the decision to coast for a while or invest aggressively usually depends on the age of the founder’s children, their intelligence, abilities, and interest in participating in the family business.
When the owner is able to take a long term view of the business, he can be more willing to take the chance to invest in experienced non-family members and know that the business will still have something to offer his offspring sufficient opportunities. Plus, non-family members can tell if they are expected to truly drive growth or are just part of a holding pattern.
Be Willing to Take on Debt
If they are lucky, a distributor can grow to $25 million/year without making a major investment software, but I don’t know of any that haven’t. The profit margins and cash flow of electrical wholesalers typically don’t support the outright cash purchase of such software, so the owner must be willing to take on more debt.
Software isn’t the only investment that involves debt. Distributors growing past $25 million need a second, and then a third, hub, and they aren’t built without accepting financial risk. Experienced hub managers and sales directors expect to be paid well. Trips and prizes for your best customers don’t come without a price tag. Bar coding pays off over time, but the owner must be able to see past the next few quarters to be willing to do it.
Be Willing to Expand the Definition of Your Market
The typical electrical distributor will have grown their business around a core group of small contractors within a metropolitan area. Larger competitors have more of the industrial, OEM, and MRO accounts. They even get most of the purchases from larger contractors. Yet when you ask the owner of a small electrical distribution company what share or their market they get, he will say that he has a major portion of what is available.
However, answer is a reflection of how the owner views his market place. Many owners are reluctant to expand the definition of their market because it becomes discouraging, if not overwhelming, to learn that you have an insignificant share of what’s available.
A visionary leader will see the opportunity in selecting accounts to earn (take away) from larger competitors. He will see the possibilities involved with attracting an account manager with experience selling to industrial, OEM, or MRO accounts. The optimistic business owner will want to at least consider the possibility of new product lines and services like wire cutting, spool rental, tool repair, or data comm.
It can be a very enlightening process for owners and managers of electrical distribution companies to analyze their market share with an eye to expansion opportunities. There has been a palpable turning point for key managers every time I have facilitated market share analysis with electrical distributors that had been hovering in the $25 million/year range for several years.
The excuses that outside sales people have been spouting suddenly don’t seem credible, or the management of the projects department starts to feel that he is insufficiently prepared to handle the level of business the company should/could have. The warehouse manager starts to wonder if he should rethink who should be hired to oversee shipping and receiving, or the owners start to wonder if their controller will need some additional training to know how to analyze scenarios and help guide investment decisions. Lead sales people start to identify specific accounts that they now want to go after.
Be Willing to Invest in Real Managers
The majority of owners of distribution companies believe in promoting people from within which is laudable. However, the practice also leads to “The Peter Principle” where people are promoted above their level of competence. An employee who can oversee a warehouse usually doesn’t have what it takes to be a true Director of Operations or COO. Simply put, one is clearly a “doing” job and the other is a “thinking” job. An active person who has enjoyed directly solving problems and fixing things typically will not be able to embrace a desk job that involves delegating to others, timing when bar coding would make sense, evaluating layouts, overseeing the establishment of a second hub, and interviewing software vendors.
Be Truly Interested in the Needs of Your Customers
The owners of every distribution company for which I have provided consulting services has said that customer advisory councils, focus groups, and/or surveys have been their best investment in the growth of their businesses.
If you are accustomed to serving smaller contractors, how can you realistically expect to understand the needs and buying patterns of larger contractors or nationwide industrial corporations without research? And the best type of research is direct communication.
Plus, the needs of your customers changes over time. Contractors are also struggling to grow their businesses. What can your distributorship do to grow their companies during recessions? When they hit predictable plateaus? Or when they lose key employees or a major account?
Be Willing to Deal with the Human Element of a Growing Business
At $25 million, the managers of individual branches can still get away with what is called “silo” mentality. Branch managers who had founded their businesses and sold to a larger distribution company are particularly susceptible to an insistence on doing things their own way. I have seen former entrepreneur/branch managers refuse to incorporate the corporate image in their location, refuse to follow personnel policies, and resist participation in management meetings, research projects, and committees.
The owner who permits each branch to maintain its own separate rules and culture will surely stunt the growth of their business. It takes guts for a President to stand up to entrepreneurial branch managers and look beyond what seems to be an acceptable sales volume in the short run. Pretty soon, those branch managers will want to do their own purchasing and bypass headquarters, which results in duplicate inventories and resentment.
An owner who is unwilling to clear out “dead wood” quickly loses his credibility with employees. Such indecision or avoidance discourages employees from putting in any extra effort because their boss won’t recognize the difference.
Another aspect of human nature is the fear of the unknown. A hard working employee with little or no higher education can run a warehouse for a small distribution company, but a business with a few hubs and over a dozen locations requires the use of software, analysis of significant ratios (turn rates, order accuracy, fill rates), an understanding of what impacts gross and net profit, etc. The introduction of complex equipment, computers, and reports can be pretty scary.
Also, if employees are not scared about what they don’t know, they are afraid about what their bosses don’t know. It takes constant communication of the logic behind the company’s vision, mission, goals, and major strategies to reassure worried employees. The owner of a distribution company that is successfully growing from $25 million to $100 million will feel more like a teacher than a decision maker.
Summary and a Warning
It is clearly possible for an electrical wholesaler to successfully grow past the predictable plateau that exists around $30 million, but it does require long term vision, an interest in continued learning, an ability to make tough decisions, and a willingness to invest.
One warning: if you decide to take the journey from $25 million to $100 million, remember that it’s important to have a vision and mission that transcends hitting $100 million goal. Otherwise, hitting that goal can feel anticlimactic.