In the last edition, we explored John Seiffer the OG hustler and his early video rental venture that still works today with 1 customer. 

This week, we're diving into his Stages of Business Growth model.   

Overview: 

Businesses go through different stages of growth and what the owner needs to do and what s/he can expect from the business changes at each stage.

The Story:

After successfully running his video rental business and other companies, John spent the balance of his career as a coach for other business owners. 

Through that work, he realized that not all owners face the same challenges and that those challenges change over time.

What he began to see was that companies had stages to their growth and that affected everything from the value of the company and how much cash or profit it produced to what the owner spent his time on.

As you can see from the model below, there are three key phases.

1. Stage 1 (Hands-On, Head Down): The owner is very customer-facing, doing much of the selling and production work himself. There is limited wealth or transferable value in these companies beyond the owner's labor. 

2. Stage 2 (Head Up, Hands-On): The owner steps back from customer work and focuses internally on building systems, processes, and organizational structure. This is the systems development phase. 

3. Stage 3 (Head Up, Hands Off): With solid operations in place, the owner takes a higher-level industry view. The company may acquire others and have substantial transferable value beyond the current owner. At this stage, CEOs aren’t focused on employees, instead they focus on the market. That might include acquisitions but they are primarily focused on the competition and industry in general. 

Most businesses remain stuck in Stage 1 with "owner jobs" because making the transition to Stage 2 (systemizing the owner's role) is very challenging.

Most of these Stage 1 companies aren’t worth anything once the owners are gone. 

This is one of the issues with the concept of the Silver Tsunami.

At Stage 2, the company gains profits and equity value above the owner's compensation.

This is a great company to run. You are truly an owner, making a profit beyond the market wage you get as CEO. 

You are building wealth.

But in Stage 3, the company's saleability and value potentially exceed the cash flow going to the owner.
 

I took two key learnings from the model:

1. Value Creation: I like the focus on value creation in the model. There is no value in Stage 1 beyond the return on labor to the owner. In Stage 2, the company is building value but is still more valuable to the owner than it is to a buyer. 

It’s only in Stage 3 that its value to the buyer exceeds the value to the owner. I hadn’t thought of “when to sell,” in this way before.

2. Impact on Acquisitions: This is a good framework to use when making acquisitions. You should avoid almost all Stage 1 companies. The chances that you could run one successfully are low and hardly worth the effort. 

Stage 2 companies are what you want but as the model shows, why would anyone sell one? 

They pump out cash and are easier to run. 

I tend to think the only time you get one of these is because of one of the three Ds: Divorce, Death, or Disability. 

Retirement is also a reason owners sell but make sure their spouse is pushing them to do it. 

Otherwise, almost any deal sounds worse than continuing to run the business.

Stage 3 companies are probably beyond the capacity of most everyday buyers to purchase. A company that is truly self-managing and aligned with the market will attract strategic buyers who can afford to pay more and can enhance the value creation through further synergies (ie sell a product or service to an existing client base, etc.) or by financial buyers who can combine it with other companies to get a scale advantage.

Study the model yourself and figure out where you are. 

I’d suggest you call John if you don’t like what it tells you.

📅 Next Week:

Next week we are going to deep dive into Alex Chernobelskiy and how to properly vet and think about LP investments and the key frameworks or methodologies SMBs should look for when approaching LP investments. 

Keep growing,

Alan

P.S. 

The most recent episode of The Small Business Mentor Podcast is live. My guest this week was John Seiffer himself. We went into detail on his journey as an entrepreneur and we talked about the core concepts covered in his books ‘Output Thinking’ and ‘Three Stages of Business Growth Model’.

Check it out here: 

• Apple: https://bit.ly/3HiB6qq

• Spotify: https://spoti.fi/3O2fK4g

P.P.S. 

As much as I love sharing what I think I would love to hear what you think!

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