Investing In Growth Companies
The scenario may go something like this: Your business has made it through the start-up years, you have a core group of good employees and growth is happening. All good, right? Maybe. While the basic operational structure seems “fine,” this growth may be starting to strain day-to-day operations with related issues consuming more of your – and your key employees’ – time.
Where is the strategy? The innovation? The most effective use of the company’s talent and financial resources?
Growth For Growth’s Sake?
After the start-up phase, the second-highest killer of businesses is transitioning from a small to a medium-sized operation.
“They grow themselves to death,” said Jason Warren. “If you look at bankruptcy filings, most companies that go belly up had their best year the year before. There is a tendency to think ‘What got me here, will get me there,’ but employees get burned out, disenchanted.”
It is this part of a business’ lifecycle – that is, long before failure – where Warren’s interest lies. Warren is one of three partners in MI Local Investments, a Traverse City-based $10 million private investment company with holdings in real estate and business mostly in the Grand Traverse area.
“We want to be a force in TC to help small and medium-sized businesses thrive,” said Warren, who grew up on an Old Mission Peninsula cherry farm. “The next four or five years will be interesting to see. Many of the people here now don’t know what downtown TC looked like in ’93,” – a far cry from the thriving place it is today.
Added Warren, “Our goal is to keep the younger, vibrant talent here for growth.”
After heading to the University of Michigan in the early 1990s to earn a finance degree, Warren switched to accountancy when an opportunity to work for the FBI came about. Long story short, he didn’t end up with the FBI thanks to a federal hiring freeze but instead back in his hometown.
He spent 15 years gaining “sweat equity” for a CPA practice that offered “a controller or CFO for hire” service, allowing Warren to see the inner workings of a variety of businesses and gain experience guiding them through the ups and downs of ownership. He then went on to head the finance and human resource operations for Shoreline Fruit – overseeing sales growth from $24 million to $50 million over five years – before leaving in 2013.
A Short-Term Fix
Today he manages the investment group’s portfolio, which includes nine pieces of commercial real estate, including the Chase Bank building at the corner of Front and Park streets (in partnership with the Miller Investment Company), and the new hops farm in Acme Township (MI Local Hops).
The investors are also silent partners in two local businesses, helping with management and operations. They looked at 15 companies before deciding to work with those two, Warren said.
What specifically are they looking for? Companies that have reached a point where they need to put more sophisticated tools in place, explained Warren, to efficiently manage sales, distribution, purchasing, cash flow and other business operations.
“We will only consider working with people with a track record … who just need assistance. We look at where we can make the biggest impact on the biz community.”
The “fit” with the owner also has to be right – for both parties.
“The owner has to decide if he or she has the mentality to do this,” said Warren. “It’s an uncomfortable position” – this process of relinquishing some control.
It also can be emotional. For some owners, he added, it can feel like they are losing some of the entrepreneurial spirit that fed the launch of the business and guided its early success.
“The owner can still be the cowboy,” said Warren, “But has to be able to let others do the stuff he can’t do.”
A typical “partnership” lasts two years, he explained, operating with clearly-defined goals, a timeline and “a mechanism to buy back our interest.”
“Our goal is to come into a business with capital and expertise … and then transition ownership back,” said Warren. “This is not long-term help but a short-term fix.”
The Step From ‘Small’ To ‘Medium’
Warren offered these tips for companies taking their operations to the next level:
- Learn how to hire managers – Be willing to transition authority. Owners should focus on their skillset or expertise and make the investment in people in the areas where they don’t excel.
- Recognize that systems and processes are needed – In growth, an organization is becoming more complex. That increasing complexity necessitates more operational sophistication. This means everything from employee job descriptions so expectations are clearly stated to reporting systems to track the company’s performance daily.
- Forward-looking planning – A three-year rolling business plan and projections – all revisited on an annual basis.