Shrink to greatness is a phrase I’ve often had to use when working with clients. To be honest, it’s rarely received well by those I’ve had to tell because everything we read about how to be successful in business says you must grow. So, this contrarian approach can be a little challenging for the recipient to accept as it goes against everything they’ve been led to believe.

Numerous articles have been written stating that you can’t shrink to greatness. However, under the right circumstances it’s the only course of action that must be taken. Otherwise, they risk becoming just another wreck on the side of the entrepreneurial highway.

Why Shrink to Greatness?

Why would a business need to shrink? Well, most of the time it’s a simple matter of the owners ambitions outstripping the ability of the business to support the rate of growth. One of the early warning signs is that expenses are overtaking revenue. It’s interesting to note that in many cases that I’ve seen, generating revenue was not a problem, but doing so in a profitable manner was.

How they got here is really quite simple. In the early days, when overheads were low, most sales, jobs, or contracts were deemed to be profitable. That’s an easy assumption to make, because with minimum expenses, they always seemed to have money and they were getting every piece of business they were pitching. So naturally, they assume that they’ve hit upon a formula for success.

What often happens though is that, with all things being equal in terms of capabilities, they were getting the business in large part because they were cheaper. And they were cheaper, because they weren’t allocating any overheads to their pricing. Now, this is how most of us start, and it gets us in the game. But as the business grows, we need to modify our pricing in order to allocate our actual expenses to our pricing model. This is simple enough for those of us who were fortunate to figure this out, but unfortunately, many don’t.

Not for everyone

Shrink to greatness is not an effective strategy for everyone. One of the key considerations I look at before making this recommendation is what kind of business are they doing? If they have regular repeat business from a core group of accounts, then it may be a candidate. Having repeat business tells me that these accounts are happy with the results and loyal to a degree.

The other key I look for is if the client is willing to make the drastic changes required. When we attempt to shrink to greatness it is a difficult decision, it’s a leap of faith and a blow to their ego. It requires them to make decisions and take action contrary to what they have believed and outside their comfort zone. These decisions, albeit painful, are the short term pain they must endure in order to end their current misery and right-size their businesses.

The following are two examples where I used this strategy to save one company’s ultimate demise and another as a basis to get beyond just breaking even.

The Marketing Agency

The first example is when I was asked to meet with the owner of a marketing agency as a favour to their bank manager. When we first met, I got the impression that he was meeting me under duress or pressure from his bank manager. We chatted for an hour, but it was very one sided and it was clear the business needed to shrink and I told him so. I left that meeting feeling that my advice had fallen on deft ears, but I had fulfilled my obligation.

About a year later I received an email from the same individual asking for another meeting. My initial thought was that I wasn’t about to waste my time, as his reaction to our previous meeting was still clear. However, always willing to help a fellow entrepreneur and for some unknown reason, I agreed to meet with him again. My plan was to make it a brief meeting, if I felt it was going to be a waste of my time.

This time, it was very different. After opening pleasantries, he immediately said, he should have taken my advice a year ago and now his situation was desperate and that he had no idea what to do and it showed. Now, from my stand point, I went from being prepared to blow off this meeting as soon as possible, to trying to formulate a rescue plan.

During the year between meetings, he had dug himself into such a hole, I wasn’t sure if the business could be salvaged. However, nothing ventured, nothing gained. The plan was to strip his expenses to as close to zero as possible. That meant letting people and premises go which he was reluctant to do because of the perceived in-house expertise, as well as losing a place to meet with clients.

I made him aware that he didn’t have any special in-house expertise that couldn’t be hired on a freelance basis as his needs demanded. He reluctantly agree that what I was proposing made sense. However, giving up his office space would give him nowhere to meet with his clients. To this I asked, how many clients visit your premises? His answer, “hardly any”. I wasn’t surprised in his answer. The reality is that people want convenience and that usually means visiting the client at their place of business as it saves them time.

So, during the hour we met, I laid out exactly what had to be done or else he would be finished. Within a few days he executed everything we talked about and moved his business into his spare bedroom in his apartment. Within six months, he was making and keeping more of the money flowing through the company and was far happier than he had been. In addition, he had lost a bunch of weight that had accumulated during the previous year as a result of the stressful environment he had created.

He offered up a very lengthy testimonial to me that states in part “Greg’s no-nonsense, action-oriented wisdom saved my business (and maybe even my life – I’m not kidding)”. Check out my LinkedIn profile to read the full text of this testimonial.

The Contracting Company

My second example is with a contracting business that had been in business for 12 years when I first met the owner. Throughout that time, they made money some years and lost in others. On average they were breaking even. They had a staff of 10 and were doing some impressive revenue numbers, but not making money.

Once again, shrink to greatness was my prescription. It was clear that the nature of the revenue couldn’t support the expenses. One of the first steps was to reduce both the administrative and field personnel staff by a third and to relocate to smaller premises. None of this could happen though, unless they cut their revenue by 30-35%.

Generally cutting revenue is not part of the plan, except in this situation the revenue to be cut was a service contract that was coming up for renewal after 5 yrs. This contract was very low margin that required 24/7 on call capabilities. Not renewing this contract would relieve tremendous pressure in both the financial and human resource areas of the company

Over the 18 months this plan was put into place, total headcount was reduced by 50%. The business was also relocated to much smaller premises. The net result was that revenue dropped by 30%, but profitability skyrocketed.

These two examples illustrate that sometimes trying to grow your way to profitability may not be possible. Whether the reason for this are internal or external really doesn’t matter. What does matter is to recognize that the current business model isn’t sustainable nor profitable and sometime drastic, uncomfortable decisions need to be made.

Shrink to greatness, may be exactly the prescription your business needs so that you can achieve your goals and dreams.

You also enjoy SBM#81 – Burnout


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2 comments on “Small Business Minute #83 – Shrink to Greatness

  1. gregw Feb 14, 2020

    Hi Greg,
    This was an interesting post, as I am just about to expand, so I can have more free time. Sort of the opposite of what is going on in your two case studies, but so good to have my eyes open if I don’t manage things profitably. I’m going with small growth, so I don’t think I will have a problem.

    • gregw Feb 14, 2020

      Hi Melanie,
      I hope the examples I used will give people pause before they start any growth. All growth needs to be both manageable and sustainable otherwise, what’s the point. When we begin to add capacity, we typically encounter or can expect to encounter a hit to our profits. That’s to be expected, but not endured for any length of time. Growth is an investment that needs to pay off and the sooner the better. Chasing endless growth, “hoping” to get profitable rarely works, except in some isolated tech companies. Most of need our decisions to show results. Good luck on the expansion – Greg