It’s a truism that most small businesses struggle to scale. In our experience, this difficulty often stems from the lack of foundational elements necessary to support the business’s infrastructure. Many entrepreneurs lack the resources to put these elements in place, limiting growth or even putting the business’s survival in question. Successful companies prioritize strengthening their core, which leads to higher-quality information, systems, and people. The elements themselves may not be surprising but are impactful when applied. It’s important to consider financial information with a focus on implementing GAAP accounting, defining a clear business strategy and budgeting, augmenting or improving the leadership and middle management team, and investing in a clear and actionable sales and marketing strategy.

One cannot forget about risk factors like cybersecurity or operational inefficiencies and the need to understand gaps in systems to create the right implementation plan. The allure of rapid growth can sometimes overshadow the importance of investing in a strong foundation. However, businesses that make the effort to build a robust organizational infrastructure are better equipped to withstand the pressures of scaling.

In traditional private equity, there’s often an emphasis on quick wins and the focus on a “100-day plan.” However, when it comes to growing pre-middle market businesses into the middle market, a longer-term perspective is essential.

The difference between success and failure for a pre-middle market business lies in its ability to establish the infrastructure for growth. This takes time and deliberate effort that cannot be rushed. Depending on the circumstances, setting up the right systems, processes, and enhancing the management team can take 12-36 months to truly be ready for scalability. As we work closely with entrepreneurs, we also learn more about both threats and opportunities for the business and how to adjust the strategy accordingly. For example, during strategic planning with one of our recent investments, we initially identified an organic growth approach during due diligence but realized that a roll-up strategy would be more effective. This would not have been possible without a longer-term engagement.

This extended timeline also provides the flexibility to navigate unexpected challenges. The COVID-19 pandemic in 2020 is a prime example of how quickly market conditions can shift. Several of our businesses were significantly impacted, but we saw these business leaders use the longer-term perspective to evaluate the situation, pivot, and implement the right solutions, ultimately enabling these companies to emerge stronger.  Additionally, business value increases in a pre-middle market business are not linear; the business needs to reach a certain scale to benefit from the higher valuations associated with the middle market. This scale is not achieved overnight but requires patience and support over several years.

To grow into a middle market business, the company must be prepared to shift from an entrepreneurial to an operational mode. This shift places a premium on the management team’s ability to avoid distractions from shiny new opportunities and to develop and stick to a well-defined strategy. Entrepreneurs who succeed in this transition use a structured strategy planning process to clearly define corporate objectives and the means of achieving them. This process culminates in the creation of a strategy statement. Unlike a mission statement, the strategy statement is a clear articulation of the company’s core objectives and the processes to achieve them. As a result, every endeavor and initiative is evaluated through the lens of the established strategy. This focus ensures that everyone in the company, from upper management to hourly employees, is aligned with shared goals, driving engagement and accountability.

For small businesses, the margin for error is thin, and chasing after every opportunity depletes resources. Companies that maintain a strong strategic focus are better positioned to achieve their long-term goals.

It’s impossible to grow a business without monitoring, understanding, and implementing the lessons learned from your efforts. This requires measuring the key drivers of success, which most small businesses don’t do. To scale, it’s imperative for a small business to establish clear KPIs tied to its corporate objectives. The challenge is developing a deep understanding of the business to find the “right” metrics that reflect the true drivers of success. With the rapid pace of technological advancement and market shifts, real-time data and analytics have become more accessible than ever. However, not everything that can be measured should be. The business leaders able to grow their businesses understand the importance of delving deep into their operations to identify true drivers of operational success.

It’s equally important to incorporate these metrics into regular business reviews to ensure that the information is not simply “put on the shelf” but used to course-correct and make informed business decisions. You can start by implementing frameworks like the OGSM l (Objectives, Goals, Strategies, and Metrics) or other planning methodologies to develop key performance indicators and incorporate them into monthly leadership business reviews.

Perhaps the most rewarding aspect of working with small businesses is the partnership experience. Unlike larger corporations, where roles and expectations are often rigidly defined, small business leaders typically wear many hats. They possess deep, niche knowledge of their industries but may need supplemental business insights. This is where the partnership between private equity and small business founders and CEOs, becomes transformative.

A successful partnership is built on mutual learning and trust. Entrepreneurs bring a deep understanding of their customers, innovative approaches to problem-solving, and a clear vision, while private equity partners provide business insights, operational expertise, and strategic guidance. This exchange of knowledge not only strengthens the business but also builds the relationship, leading to better outcomes for everyone involved. To facilitate this type of partnership, we eschew the traditional “once a quarter” business reviews. Instead, we focus on a multi-faceted approach to communication, leaning heavily on project interactions to build trust, share information, and drive changes within our companies.

We see our role as empowering company leaders to make informed decisions, fostering a sense of ownership, and supporting them as they navigate the complexities of growth. The result is a more resilient, capable leadership team that is better equipped to steer the company toward sustained success.