Why Businesses Stall Between $1M–$3M and How to Scale Past It | Ep 184

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Most businesses stall between $1M and $3M in revenue. Cash gets tight, profit disappears, and owners feel stuck doing everything themselves. In this episode, Steve Coughran explains why the “death zone” happens and what you need to change to push through it. If your company is in this range—or headed there—this will show you how to scale without running out of cash. 

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Transcript

If you're running a business that's doing between one and three million dollars a year in revenue, and I'm not talking about profit, I'm referring to sales in other words, the top line, you're operating in what I call the death zone. Now, no need to panic, I was there once before too with my first company, I was able to escape it, but the key thing is, you have to understand what it is, why the death zone occurs, and how to get past it.

Because if you don't, you're gonna remain stuck like so many small to mid-sized businesses out there, and even worse, you're gonna get killed. 65% of businesses go bust in 10 years, you don't want that to happen to you. So I'm gonna explain all this right now, and I'm also gonna provide you with a tool to help you to navigate your way through and past the death zone into an enduring sustainable business.

All right, so check this out. The reason why there's this death zone, and I'm speaking generally, so I say between one and three million dollars. For some companies, that number may be higher, depending on what industry you're in and your business model, et cetera, but I'm just speaking generally here.

Under a million dollars, you can typically run the business yourself. That was me with my first company. I was doing marketing, HR, I was doing the sales, the estimating, the operations, I was doing the accounting, running to the bank, I was wearing multiple hats. And for a bald guy, literally I was wearing a lot of hats, but also, figuratively speaking, I was spread way too thin in my business.

And once I got past a million dollars, I reached this inflection point where I thought to myself, okay, I can't keep doing this. I'm gonna burn out, I'm killing myself here. At the time, I was single, so I didn't have a wife or a partner, and I didn't have responsibilities like I do now. I mean, I have kids, I have a wife, I have a lot of responsibilities outside of work as well.

But at the time, I was able to just grind it out, but it was not sustainable because I wasn't taking care of myself and I wasn't sleeping, et cetera. So I reached this point in my life where I thought, okay, I have to do something if I'm gonna grow my business past this million dollars.

But here's the problem. Most companies, okay, most companies, once again, I'm using generalities here, just follow along, earn about 10% as a good business in profit. Some companies are even higher, okay, so that's great. But let's just use 10% as a general rule of thumb to keep things really simple.

A lot of small businesses, they do less than 10%, okay? So let's just imagine you're doing 10% and you're at a million dollars in revenue. That means you're earning about $100,000 in profit. But oftentimes, small businesses, they're not paying themselves out of that profit, or if they are paying themselves, they're definitely not paying themselves a market rate.

In other words, think about it. You may be paying yourself $50,000 a year, but if you have to go out to the market to replace yourself, how much would you have to pay this person? All right, probably a lot more oftentimes.

So let's just go back to the million dollars in revenue, $100,000 in profit, and this inflection point. This is me. So here I am, $100,000 in profit, and I'm thinking to myself, okay, I need to bring somebody on to handle the scale, to scale the business to the next level. I need more capabilities in my business.

I'm gonna have to bring in an experienced hire, so they're gonna cost more money. And I'm looking at my $100,000, and I'm thinking, if I bring somebody on, they're gonna be expensive. They're gonna eat into my profit. If they don't work out, guess what? I'm taking home less. And that means my financial situation is gonna be a lot tighter if it doesn't work out.

And this is where a lot of business owners find themselves, at this inflection point. They're looking at their profit, they're looking at their take home, and they're thinking, if I sacrifice my personal financial situation to bring somebody on and it doesn't work, there's gonna be a lot of pain. So they're trying to gamble with this decision because they're thinking, okay, if it works out, I scale the business. If it doesn't work out, I'm in an even worse position financially, and then it's gonna be even harder to come back and then scale the business.

And this is why so many small companies stay small. That's why they stay stuck in this death zone. Now, if you stay under this threshold, and like I said, I'm speaking generally $1 to $3 million. Maybe for your business, you can scale to $5 million in revenue before things start breaking, whatever the number is for your business. I think you get the point.

You can stay under this threshold where you can run the business sustainably by yourself as a solopreneur, and that's fine, but there's a limit to it. But if you wanna scale your business, if you scale your business, let's say from $1 million to $2 million, now you're in the death zone because if that hire doesn't work out, you're gonna run out of profit, run out of cash, you're gonna put the company in a bad spot.

Or you bring that person on, you reach $2 million in sales, now you have to bring on more overhead to support those sales, your costs go up, your margins go down, and therefore you're gonna find yourself in a very tight position, especially from a cashflow perspective.

I've had a lot of conversations with you, maybe not you specifically, but you listeners out there who reach out and set up meetings and set up phone calls with us, and the number one thing is cashflow, right? That's oftentimes the biggest constraint in businesses is cashflow. So you can find yourself in a cashflow crunch in this death zone, all right? So you definitely don't wanna stay there.

But here's the deal. There's another path forward. Instead of hiring an experienced person who may or may not work out, you can rely on experts outside of your business and use them on a fractional basis in order to help your company. So we do this all the time at Coltivar.

When we go in, sometimes we'll buy businesses, we'll invest in businesses, or we'll help them on a fractional basis, and really what we do is we put in place our system, and the system helps them to scale.

Because here's the dangerous thing, and this is a word of warning here because I've seen a lot of companies do this. They get to a certain point and they start hiring people and they think, I'm gonna hire somebody, and they may not have the systems and the processes in place, but they think, I'm gonna hire this person with experience, I'm gonna bring them into my company, they're gonna create the systems and the processes for us to scale, but guess what? The scaling doesn't happen.

Because the person you're bringing in to have that skillset across the board is really tough to find. I always say there are finders, minders, and grinders. The finders are the people who can find value, they can find sales, they can find leads, they can find ways for the company to grow. There are minders, those are the people who mind the work, like M-I-N-D, like manage the work, they're the managers. And then the grinders are the people just on the front line delivering the product or service into the hands of customers, they're just busting things out.

But it's really hard to find somebody in the business who's a finder and a minder and a grinder all at the same time. So for small businesses, it's really tough because you need people who can wear multiple hats at once. Because you may bring somebody in, but it's not a full-time position to do CFO work, or it's not a full-time position to do sales and marketing. So therefore, you need them on a fractional basis, but across different functions, and they need to have that experience, and it's really tough to find.

Plus, it's really hard to find somebody with a design-type mindset where they could design a system, and then they can implement the system, roll out the system. They could also manage the change in the business, and then train people, and then execute on it. I mean, all those things require a different skillset. And that's why a lot of these initiatives and a lot of strategies fail in businesses, because especially when they're small, they bring in people, and they only have one type of skillset, and they're not skilled across multiple capabilities to roll things out.

So that's where you have to be very, very careful in who you work with and who you hire. So when I was starting out, I used a lot of people on a fractional basis, and that was really helpful to build my brand, to build my sales and marketing function, and to build my accounting function. Then eventually, I went back to school. I did my own accounting and finance, and I did that all in-house, because I had the capabilities.

Nonetheless, you have to find the right people who can demonstrate skills across the board. Otherwise, you're gonna be working with five different coaches or 10 different consultants that are not gonna be talking with one another, and your business is gonna be a mess.

But once you pass this threshold, you have to be able to scale very quickly. That's how you're gonna get out of the death zone, is you, number one, have to have a really strong funnel. The funnel is how you bring leads into the business.

So once you bring leads into the business, you have to have a really strong offer. So the offer has to be so good that your customer's like, I would be an idiot not to go with you. And in addition to the offer, your pricing has to be dynamic enough. In other words, you have to have a model in place that allows you to collect more cash up front than it costs you to acquire that customer initially and to service them.

I was just talking to an entrepreneur just the other week, and he was in my office, and he's talking about how he's getting all this pressure from his investors to grow the business. But every time they grew the business, historically, they lost a lot of cash. They burned through a lot of cash.

And I said, show me your numbers. And so he's like, we collect about $400 up front. And I said, okay, what's your customer acquisition cost? And he said, it's about $300. And I said, what's your cost of delivery? And he's like, it's about $500. And I was like, ah.

So every time you bring on a new customer, it costs you about $800 to service them in the first 30 days. But you're only bringing in $400 up front. No wonder. So every customer you bring on, you lose $400 in cash flow. And he's like, yes.

And I said, okay, that's where you need to change your model. That's where strategy comes in, is changing your model, how you compete. And that flows back to your offer, and it goes all the way up your funnel and who you're attracting so you understand the right ideal customer profile, bringing them into your business, they get your value proposition, you have a strong offer, the model works, and cash flow follows.

So that's what I'm talking about here is when you're scaling your business, if you don't have the right type of model, then you're gonna grow slow because you're not gonna have enough cash coming in the door to acquire new customers. And so you have to have a model where your customer acquisition cost is less than the gross profit that you're earning from your customers, especially in the first 30 days.

So there's a ratio that we use at Coltivar. It's called LTGP, lifetime gross profit, to customer acquisition cost. We don't really look at LTV, or we just clarify LTV, that's lifetime value, you may have heard that ratio, but oftentimes people talk about LTV as like revenue that a customer generates, but we look at the gross profit that's generated from a customer.

So we want a LTGP to CAC ratio of at least three to one, because over time, this ratio's gonna compress because it's gonna be harder to find more customers, your cost of finding those leads is gonna go up and it's gonna just compress together.

So if you're at three to one, that's the minimum, and then you wanna try to expand it from there, by increasing the gross profit per customer, the lifetime per customer, or lowering your customer acquisition cost.

But if you don't have this ratio nailed down and you're in the death zone, you're not gonna bring in customers fast enough, you're gonna stay stuck in the death zone, your costs are gonna be too high, and guess what, you're gonna run out of money and you're gonna think, okay, I'm just gonna try harder next year, but you try harder, but the fundamentals of your business, the strategy, the operating model, is broken. That's why you're gonna stay stuck.

So you have to be able to fix that so you can move forward. And so that's what I did in my business. Initially, when I was running my landscape company, we would collect 50% up front on our contracts. So for example, we were doing a $100,000 project for a homeowner, we'd collect 50 grand up front when they signed the contract in order to put them on the schedule.

Well, guess what? The next payment was collected at the very end of the job. Well, if I was collecting 50% up front, by the time we got halfway through the job, we had already incurred 50, 60% of the cost. And by the time we got to the end of the job, we were negative from a cashflow perspective.

So that just meant the more jobs we did, the more negative we went from a cashflow perspective. So I changed our payment terms and our contracts, so we were collecting 25% when they signed the contract, 25% when we arrived on site the first day, so we had 50% on the first day of starting the job, collected another 25% at midpoint, and then we would sometimes collect another percentage, so we only had five to 10% left over by final walkthrough.

And by changing those terms, it changed our cashflow and it changed everything. We also renegotiated our terms with our suppliers, and we were more careful with our capital expenditures. That's what I'm talking about when it comes to model and knowing how to put in place a strategy in your business so you can grow, but also having those financial tools so you can look at your business and know, okay, how fast can you grow? What does cashflow look like? Not just now, but in three months, six months, nine months, et cetera. And then what are the KPIs to monitor so you stay in business?

That's the key. So you want to avoid the death zone. You need to grow your way or accelerate your way through the death zone.

I was just talking to a contractor just the other day. He's at $1.2 million in annual revenue, and I was like, look, you have to get to $3 million really quickly, because if not, you're gonna stay in this death zone, you're gonna lose a lot of money, your company's gonna have more overhead compared to your revenue, you're not gonna have the margin to cover it, and cashflow's gonna be super tight.

So you have to accelerate your path through to this $3 million and beyond revenue target.

So the tool that I have for you is at Coltivar, Coltivar.com, I'll leave a link in the notes down below in the description, and it's totally free. We spent a ton of time putting together this resource, and in there, we have checklists, we even have a calculator, and we have a go-forward plan for you. Okay, we have everything you need to grow your business and stay in business.

That's the key. The coolest thing about this is that there's a calculator in there where you can enter in a few numbers and determine your sustainable growth rate, your SGR is what we call it. Your sustainable growth rate will tell you how fast can you grow your business without taking on additional debt or giving up equity in your business.

If you don't know this percentage, you can grow yourself out of business. That's what drives me crazy. There's so many influencers out there on the internet, they're talking about grow, grow, grow, double, triple, 10X your business, and I'm like, yeah, you could triple your business but not have the cash flow to do that, and guess what, you're gonna go bust.

That's why, if you ever watch Shark Tank, these people grow their businesses and they're profitable, and you're wondering why are they willing to give up a percentage of their business for cash? They're profitable, and it's like, they need cash because when they scale, they need more working capital and they need more cash for capital expenditures, et cetera.

So, knowing your growth rate's gonna be really critical. It's in this guide. It's an exclusive calculator to this guide. It's all free, all right, so it's all free for you, but know your sustainable growth rate and then figure out a plan to grow past this death zone and the odds of your survival will be so much higher than if you just try to go at it alone, and if you're in the middle of this, just be careful not to stay stuck too long because there is a true cost to waiting. It could be detrimental to your business as well.

All right, that's what I have prepared for you, and until next episode, take care of yourself. Cheers.