The statistics surrounding the survival rate for small businesses have long been subject to fervid debate. Depending on who you're talking to, the predicted life span for a startup can elicit grim to cautiously optimistic responses. One commonly cited figure is that half of all businesses go under in the first year while 95% fail within the first five years. According to a study done by the Small Business Administration, two-thirds of all new small business survive the first two years but only 44% will still be operating by year four.
Common culprits for failure include undercapitalization, cash-flow crises, and overexpansion. Then of course there a host of external factors that nobody can predict—let alone adequately plan for—such as volatile credit markets and unstable economic cycles.
To gain insight into specific practices that enable small companies to keep going and growing even during difficult times, BusinessWeek profiled three entrepreneurs who have reached benchmarks in their companies' life cycles: three years, five years, and 10 years. Their stories and strategies follow.
BYD Ranch & Kennel
After 20 years doing business administration for a number of small businesses, Miriam Rieck decided to go out on her own and open a dog and horse boarding kennel in Bryan, Tex. In 2007 Rieck and her husband plunked down $100,000 from their savings to purchase a 45-acre ranch and built BYD Ranch & Kennel's facilities. Rieck says she differentiates it from her competition by limiting the number of runs so that she can devote more attention to the animals. The practice resonates with customers. "My clients are like an extended family and their animals are like their babies."
Rieck says working directly under the owners of those earlier companies helped prepare her. For one, Rieck says she recognized the importance of defining boundaries between your private life and business life, a line that can often blur when you own your own business. Moreover, she says, "during the crucial first years I learned you really always need to recycle money back into your business instead of taking money out of it. A new business needs to stay fresh, especially in an industry with animals. The property can look dirty and dingy really fast. People consider their dogs like children and they want them taken care of like they are at home." Rieck says she reinvests profits to keep her facilities in good shape. And, she says, "It's important not to cross the line and take money meant for the business and make it your personal income."
According to Rieck, a new small business that is customer service-based should recognize the importance of creating and deepening ties within the local community. "I always believed you should support the local community," she says. That includes membership in a number of dog clubs and sponsoring fundraisers for the local animal shelter. "I get out there in the community and I have a good working relationship with the area veterinarians. Most of my business comes from word of mouth. "I do almost no print advertising."
From the beginning, Rieck says she didn't set specific benchmarks to meet each year. Instead, she set a goal to increase her client base 10% to 15% annually. In her first year in business, Rieck had 100 clients; she now has more than 300. "My ideas were simplistic; I stuck to my simple goals—nothing really grand." Her revenue has increased accordingly: In her first year in business the firm made $17,000; during the second it hit $32,000, and Rieck says she is on pace to reach $60,000 this year.
Space Architectural Design Firm
When Tom Niemeier launched his firm, he planned to expand to a 20-architect office, then stop. "I had worked in a number of firms over the past 25 years and I always liked the comfort of a smaller business," he says. Rather than rely on one type of client for revenue, early on Niemeier decided to make sure he launched a firm with a diversified clientele working on educational, corporate, health care, and hospitality projects—with residential comprising only about 10% or less of the workload. "Part of my growth strategy was to pick people who have expertise in areas that we didn't. When we brought them in, we also brought in their client base," he says.
In four years Space grew to 16 people (15 architects and one office manager). "We positioned ourselves so that the people we hired were already proven and had an expertise," he says. Part of that strategy included circumscribing the firm's growth ambitions. "We never set a time on when we wanted to get to a certain level, but once we had about 13, 14, or 15 architects we became a firm that could handle almost any size project except a mega $100 million project."
Niemeier says another key decision was to keep his overhead lean. "Once a firm hits 25 to 30 people, then you have to bring in an accounting person, a full-time receptionist, and an office manager. You are just feeding the machine. We didn't want to get to that point. We all like to draw and design and be part of the architecture staff; we didn't want to just go out, play golf, and network new clients. We do that to a certain degree—but when you have 50 people that's pretty much all you do—you are buried in managing and marketing the firm."
When construction began to slow down in 2007 and business tapered off with the slumping economy, Niemeier tried to recalibrate and adjust to the new realities. In the past two years he says he laid off three people. He also purchased a construction company that he says "helped us lengthen our revenue on any given project. We design it and we build and manage the construction. It's a nice source of revenue." This year Niemeier expects revenue to reach about $1.7 million, down slightly from $1.8 million last year.
"There's never been a moment yet that I felt I was not going to make it," he says. "Even if we have had to cut people."
Before starting staffing provider Resource Options in 1999, Matt Carlin spent seven years as a hockey coach at Cornell and Dartmouth. After getting married, his wife, a former news anchor, and he decided that if they wanted to raise a family, they needed to change their lifestyles. For Carlin that meant trading in his travel schedule to start his own company.
Carlin says he chose the staffing business because it required a similar skill set to being a hockey coach: primarily recruiting talented people. "I would be utilizing the same methodologies and processes," he says. He borrowed $50,000 from his father and made his first goal paying back the loan as soon as his company became profitable. He wanted to run a business that could sustain itself with two to three people.
"Each time we had success we wanted to have some more," he says. "Initially I wanted to get to $5 million and I did that by year three. That same year Carlin says the business turned a profit and he was able to repay his father. "Then we went to $10 million, then $25 million."
During the first year, Carlin says his biggest client that represented 10% to 15% of his receivables filed for Chapter 11 bankruptcy protection. "That was an enormous loss and a big hurdle to get over," he says. "But what I learned from that is that I really had to do a better job of screening and qualifying our prospective clients. Not everybody is a good client and when they don't pay their bills in a timely manner I realized we had to fire them." Carlin says the situation also taught him "not to put all of our eggs in one basket." Following that first-year debacle that nearly undermined the company, Carlin says he redoubled his efforts in order to bring in new business and made sure to diversify the base so that any one client wouldn't expose the company too much.
After surviving the first year, Carlin says by the time he reached year five his biggest challenge was to keep up with growth. "We were growing so quickly, we opened branches and satellite offices. We were doubling and tripling revenue every year. We were growing faster than our projections. I did a lot of soul-searching and made some key hires in 2005, and I began to delegate more responsibility." Carlin also invested in new technology and software to streamline processes and shore up his back office.
During the past two years the company's lightning growth has stalled. Carlin says "we had to face the reality that we were not going to continue to double our revenue on an annual basis in a less-than-favorable economy. We are now learning to do more with less." Resource Options has 31 full-time staffers and 850 field contractors—down from 1,200 contract positions in 2007. Carlin expects revenue to reach about $12.5 million to $13 million this year, down from $14 million last year.
Still, reaching the 10-year mark, Carlin says he realizes that owning your own business is as much a huge amount of work as it is joy. "If going into business was easy, everybody would do it."
But he says his best lesson still comes from his days as a hockey coach. "The only way to run your business effectively is to hire people that are better than you and that's what I think I am best at. It's the players that win the game, not the coaches. I say hire people that are better than me and make sure those hires get in the habit of hiring people that are better than them."
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