Growing Danger

Relentless prosperity is forcing a choice on many small companies: expand or die

Colleen Barton knows a lot about massive pressure: She has spent a career studying the forces that bend rock and move tectonic plates. Lately, the weight of client demands has the former Stanford University geomechanics professor feeling a bit like twisted bedrock herself. A Who's Who of giant oil companies, from Mobil to Shell, is clamoring for the consulting services and proprietary software of Barton's three-year-old business, GeoMechanics International Inc. "We have too much work!" says Barton, who helps clients estimate the strength of rock they're drilling through. On the one hand, she is afraid to turn it down for fear of losing a client. On the other, she's worried about the company's ability to handle the load.

Barton's plight frames a dilemma wrought by the country's economic boom. Good times, just as much as bad times, force choices on business owners whether they want to grow quickly, slowly, or not at all. And in this soaring economy--growing at 4% annually, compared with a historical average of 2% to 3%--the choice can come down to grow or die.

Most small companies are indeed growing. Two-thirds reported capital outlays in the last six months, and a record 21% plan to add new employees--if they can find them--according to National Federation of Independent Business surveys. Reports of blistering double-digit sales gains are common. On the face of it, that's great news.

But in some quarters, the growth may not be entirely voluntary or even welcome. Despite the prolonged boom, small businesses surveyed by Arthur Andersen last year said coping with the economy is their greatest challenge. If you grow, it might mean taking on debt that you'd like to have in the next downturn or adding people who would alter the small-company culture that you've built. "A lot of businesses have a psychological limit of around 15 people," says Jerome A. Katz, director of entrepreneurship at St. Louis University. "Past 10 people, it's hard to manage directly." Indeed, forced growth cuts to the core of what entrepreneurs value most--independence, setting their own priorities, and balancing work with family, which all outranked "making more money" in a Lou Harris poll of entrepreneurs released this spring.

Still, you may not have a choice. Customers are demanding more volume and round-the-clock service, while cash-rich rivals and the Internet breed competition from unexpected quarters. The question is: How will you respond? "Some want to grow, some are content to stay where they are, some of them are just forced to grow kicking and screaming," says Franz von Bradsky, president of Green Tree Capital, a Napa (Calif.) business brokerage. Here's how companies from each group are coping:

Forced To Expand At GeoMechanics' Palo Alto (Calif.) offices, it's a nonstop scramble. Barton has just received a call from a Japanese client--who wants her in Asia over Thanksgiving. "I haven't been in the country for a holiday all year," she laments. Nor have many of her 14 employees, who are constantly jetting to oil rigs around the globe. With her company growing from $1.1 million to $3 million since its founding in 1996, Barton is trying to juggle two needs: She must keep up with clients' demands for low-margin consulting projects while managing development of the higher-margin software that her company's future depends on. Barton worries about the effects of breakneck growth on an office of 11 quirky PhDs. Get too big and "the spark is gone, you lose a creative edge," she says. She hopes to stay under 40 employees, as a way of avoiding "too many middle managers."

To keep GeoMechanics focused on creating technology, rather than building a bigger company, Barton has adapted an expansion strategy useful to many small firms: licensing, or "making customers out of your competitors," as she describes it. Oil consultancy firm Oyo Geospace Corp. now bundles GeoMechanics' software with its deep-rock imaging tools. Now, every time it sells the tools, GeoMechanics gets a royalty on the accompanying software. In another deal with oil-services giant Haliburton Inc., the two companies split revenues on consulting services. "It's a way to get bigger without being bigger. We don't have a huge sales force," Barton adds. How did Barton develop her strategies? It doesn't hurt that she counts among her friends digerati Esther Dyson and former Apple Computer Inc. exec Heidi Roizen.

Unlike Barton, some entrepreneurs have to stay close to the clients--wherever that leads them. Take entrepreneur Michael Yag, whose $35 million, 160-employee company, Access TCA, handles trade-show exhibits and marketing for major corporations such as Cessna Aircraft and Cabletron. Starting in Boston 14 years ago, Yag (whose boat is named "Luckier Than Good") saw sales grow a steady 25% to 100% each year. But to keep up, he was forced to expand along a herky-jerky course mandated by his highly mobile clients. First, he added an office in Atlanta when clients began relocating there five years ago. Then, in 1997, he opened a Baltimore outlet to meet increasing demand along the Eastern Seaboard.

Spread so thin, Yag worried about maintaining a consistent company culture. "The clients had to feel the same level of service from office to office," he says. And then there was the matter of morale. The Boston employees got antsy over the possibility that expansion costs might cut into benefits and yearly bonuses (it didn't happen).

How did Yag cope? First, he tapped three veteran managers steeped in Access' candid but professional culture to run the Atlanta office. And he continues to keep information flowing to each office. "Everybody knows when times are good and times are tight," Yag says. Nowadays, employees make as many as 100 trips a year between locations. Then, there are the staff-wide Monday morning conference calls, and the twice-yearly meetings for Access' 15 top managers. For Yag, each expansion felt like he was laying everything on the line. Now, he says "the more often you duplicate the model, the more comfort you have in knowing it's going to succeed."

Growth Gone Awry They thought they had it all figured out. When partners Kenneth D. Treece and Dick Brown caught the expansion bug in early 1998, they saw huge opportunities for their precision-metals business--which primarily builds racks and frames for housing computer-server components. To increase capacity, SBMC added $1.1 million in debt to buy a rival manufacturer, on top of the $6 million of debt taken on to acquire SBMC in 1997. "We were so optimistic," says Treece. Come March, 1998, however, the Asian economic crisis began to roil the PC market, and SBMC's chief customers, Compaq Computer Corp. and semiconductor-equipment maker KLA-Tenor Corp., began yanking orders. "It was a rocky road," says Treece, 55, who watched as business plunged 30% and his loans were nearly called. Now that demand has rebounded, Treece says $17 million SBMC is all the wiser. He's trying hard to broaden his customer base to stop "these inevitable cycles that come in and crush us." Demand in 1999 is up 50%--although, characteristically, that's not enough for Treece. He's already laying plans "to become our own little roll-up."

Overexpansion can wreck far more than financial plans. It can also throw companies into management crises, says Elizabeth Warren, a Harvard law professor who has studied 10,000 business bankruptcy files over 21 years. "We see it when a business is very successful but still managed by one human being," she says. "They can't structure or delegate, and it doesn't work." It's a scenario that entrepreneurship experts see with disturbing regularity. "The entrepreneur needs to put aside his ego for the good of the company. It's not an easy thing to do," says Charles Heller, director of the Dingman Center for Entrepreneurship at the University of Maryland, who also sits on the board of five companies. As Heller points out, it's during times of rapid expansion that companies especially need the counsel of an outside board of directors--people who can help put the brakes on an overeager entrepreneur. "If you're growing so fast that you can't manage that growth, it's a time bomb," he adds.

Growth With Limits Some entrepreneurs put a ceiling on growth, and damn the economics. For them, a bigger business puts free time, financial health, and their sanity in jeopardy. In fact, 15 employees is the limit Wes D'Aponti has set at Environmental Audit and Assessment in Grand Junction, Colo., which conducts environmental tests and cleanups primarily for other small businesses. "Some people want to have a big house and a big yacht," says D'Aponti. "I'm not driven by having the biggest one on the block."

D'Aponti, however, is not passing up opportunities. He recently pumped $320,000 into new equipment to treat water contaminated by underground gas tanks and hopes to draw clients from a five-state radius and Canada, though he frets about bigger, better-connected people catching on to his niche.

In this economy, it's not likely he'll stay below the radar. That's why he needs to take defensive measures now, says Steven M. Bragg, former Ernst & Young consultant and author of Managing Explosive Corporate Growth. "The worst thing someone can do is compete on price. Anyone bigger can have less overhead," says the Denver-based Bragg. The best move, he says, is to burrow into an extremely narrow niche, while providing a high level of personal service. "You've got to focus very, very tightly," he warns. When the competition comes, you will have presumably developed skills and relationships that customers can't live without. That's just what D'Aponti is doing. He recently switched his responsibilities from internal manager to external salesperson. As he sees it, it's a crucial way to improve customer ties--and the long-term health of the business. "Who better to sell my business than the person who believes in it the strongest?" D'Aponti says.

Giving Up There's one last strategy for coping, which is neither grow nor die. It's to sell out. For some entrepreneurs, it could be the shrewdest move--business values have soared 45% since 1996, according to Ft. Lauderdale-based VR Business Brokers.

In 1997, Salt Lake City's Chad Burnett sold his family's 45-year-old equipment rental business, Rent-It-Center, to a large competitor. "We could see the writing on the wall. All these big companies could buy equipment at lower prices," says Burnett. "They were coming to gobble up market share." It's a scenario repeating itself across the country, especially among family businesses. "There's a lot of money on the table," says Kevin McCullough, a partner who handles business sales at law firm Spaulding, McCullough & Tansil in Santa Rosa, Calif. "In most cases, people are getting more for their company than they think it's actually worth." Selling out is not exactly death, and it's not exactly surviving, either. But it's something they can live with.

Before it's here, it's on the Bloomberg Terminal.