Why Saying Your Business Isn't Scalable Is the Wrong Diagnosis | Ep 987

0:00I want to talk about a business myth that needs to die. It's something that so many business owners believe. And someone is playing what it is, how it's applied to thousands of businesses that have come to our headquarters here at acquisitions.com in Vegas, and how it's likely holding you back. And it's one of the most insidious beliefs, and I think it might be the one that ends the most businesses. And the crazy part is it has nothing to do with the business and everything to do about how you treat it. Now, I've had the same problem come up again and again and again that I felt the need to make this for you, which is my business isn't scalable or shouldn't I switch my business to something that's more scalable?

0:37Again, I might gouge my own eyes out. But the reason that I'm so annoyed by it is that basically every business has limits to scalability and there are different problems that occur at different times. Now, I want to talk about this within two different contexts. One is industry context and secondary is more unlike the demand and supply side. But I'm going to break this down in a lot of different ways. So right off the bat, if you have a service business, for example, you hire humans to do things for other humans, then that is a business that's very easy to start, can be very profitable, and then over time can become a little bit more difficult.

1:12Not impossible, just more difficult to scale quickly because maintaining quality of service when you have other humans doing things and you're bringing them in and they don't know anything and you have to train them becomes more challenging. if we had kind of like the middle of the path there, you've got like an e-commerce business, which you can start relatively quickly. But as you scale up, you can scale up quickly, but some of the issues become supply chain and logistical problems, right? So I'd say that's kind of like in the middle, right? It's a little bit slower to start. It costs a little bit more money to start.

1:38It does scale faster than traditional service does, but you're still going to run into some problems. Now, all the way on the kind of extreme side, you've got the software digital type businesses. Now, these businesses are typically, when I say digital, I mean, SaaS software, not digital products like ebooks and courses, things like that. These businesses cost the most amount of time to start, the most amount of money to start. But once you achieve scale, they become significantly easier relative to the others. And so I get this question of like, I don't think my business is that scalable all the time, when in reality, it's just harder to scale.

2:09And so the thing is, is that switching from one service business to another services in terms of overall category is not likely to dramatically change your growth trajectory at all. You're still likely going to be constrained by humans, which most businesses are. I'm going to say this again. 78 % of businesses in the United States are service-based businesses. This is reality. And the reason that this is so annoying to me is that people will come and want to break their businesses. They won't want to abandon their businesses because they think that the woman in the red dress, they think this other new thing somehow doesn't have the same characteristics of a people-based business.

2:42Now, within that category, let's say we have a service business. You can have demand-constrained service businesses and supply-constrained service businesses. Each business has problems. And the crazy part is, is that the problems are actually kind of similar. So let me explain. So if you have a demand-constrained service business, so you have a brick-and-mortar fitness business, you're going to be demand-constrained. As in, it's going to be harder to find people who want to work out than it is to find people who want to teach people to work out. Right? Finding trainers and fitness enthusiasts, not that hard.

3:09finding people who actually want to come in the gym and get excited and serve, you know, sign up for a service package or something like that, much more difficult, right? On the flip side, if you have an accounting firm, right, getting people to do their accounting, everyone kind of has to do their accounting, but getting competent and high quality accountants becomes the issue. Now, how do you solve each of those problems? You promote fundamentally, you promote to get new customers, you promote to get new accountants. It's the same problem. You just have it on the back end of the business or the front end of the business.

3:40And some businesses have alternate between whether supply or demand constrained, if you kind of grow at the same rate, so you alternate back and forth. But fundamentally, and this is why I think this is so important, you're going to struggle in one way or the other. And the way that you will solve it in either of the situations is going to be through promotion of some sort. And so the reason that I bring this up is that said differently, my business isn't scalable means it's hard and I want it to be easy? And can you just tell me that it's going to be easy? And it's not. And so difficulty is a feature, not a bug of scaling a business.

4:13It is something that comes with scaling a business. And the reason I think this is so important is that there are periods of time and sometimes those periods are not weeks, but they are quarters, many quarters in a row where you have to sit with a problem as in you see the fire and it's in your living room and you have to just let it burn. So let me explain what I mean by this. There will be problems that occur in the business. Let's say that you're, you know, you're supply constrained and you need to bring new people in. Okay. So once you decide, okay, I can't handle more customers because I have to hire more accounts.

4:42I have to hire more HVAC people. I have to hire more technicians at my auto shop, whatever it is. As soon as you make that decision, you see that clearly, you start the promotional cycle. So you start kicking off ads. You start doing some outreach. You start hanging up your network. And then you start some interviews, start some screening. And then maybe you find one or two people and then you, you know, interview them. And then maybe you give them a job offer. and then once you give them a job offer, you have to get them trained up and be proficient and you might lose some of them because they're not as good as you thought they were and other ones are good, but it still takes three or six months for them to scale up.

5:11And so all of a sudden, now here, remember this, what the feeling's going to be like. You decided and you realized that you were supply constrained. You went out and you did something about it. Good for you. But once you start going out and doing something about it, what happens? Nothing. The business is still constrained. And so you just suffer day in and day out while you try and solve this problem. And here's the nasty part. Let's say that six months from now, but remember six months is 180 days of every day you wake up and you're like, I have this problem. I should do something about it. And then you have to remind yourself, I am doing something about it.

5:41But the thing is, is that your team is still going to be struggling. They're still going to be complaining. You might still be complaining. And the thing is, is your brain, your monkey brain is going to be like, we should do something about this, but you are doing something about it. It's just that the thing you're doing about it isn't going to solve it today. And the likelihood is that, and this is where it gets nasty. This is where the real problems happen. This is why this is such an important video. During that waiting period is when the vast majority of entrepreneurs fuck with shit. So they change their model.

6:07They change their price. They try and change. They're like, you know, what if we change our deliverable to, you know, it's 20 people per account instead of 10 or five. And that way we can keep selling. But then all of a sudden your service delivery drops and your churn goes up. And now you have a structural issue within the business. Whereas when you had the business that you had before this without changing it, You had good margins and good revenue retention, meaning like you kept making money and people kept paying good. And so you take something that's really good. And because you have a constraint on the system, you break the business while you're waiting for your solution that you already started on to kick in.

6:41And so this is the tangible of pain tolerance. So a lot of people like to think about like the rocky cut scene and things like that. Like, oh, I'm in business. It's the grind. The grind is oftentimes realizing there's a problem, beginning to try and solve it, and then having to live with that problem for not weeks or months, but quarters and sometimes years. Hey guys, real quick. If you're not sure if you actually have a slow solve problem or a fast solve problem, like it's like, man, I just don't know how to solve this. We solve problems in businesses, you know, every day at acquisition.com. And my team looks at companies every single month.

7:14And if you'd like to have us take a look at the business, see like where the constraint might be and maybe how to, uh, to help, then you can click somewhere on this video and you can schedule the time to see if it's a good fit for you to come out because this is kind of what we do every day. And so we've gotten pretty good at it. And like I said, if that's valuable, click, book, call. If not, enjoy the rest of the video. And so the reason I'm bringing this up is that then the next thing that you start thinking is, well, you know what, maybe I'll outsource this problem to somebody else. I'm going to delegate this away.

7:41Sam Altman had this really good bit that I saw on Instagram the other day. And he said, he's the founder of OpenAI if you don't know who is. He says, you can't delegate the execution because the idea and even the product or service, oftentimes, though exciting, is not the hard part. That's like the 10 % of the business. I mean, it's fun. You have lots of iterations, lots of changing. But then once you have it, and people are buying it, and they like it, and you make money at the end of the month, the 90 % of everything else is the actual execution. It's the doingness. And the doingness is the part where you have unrelenting problems that either you are actively solving and have not seen the fruits of your labor, or you're just solving the micro problems that happen every day.

8:19And all the while, you You have to resist the urge to break the thing that actually works that you spent all of this other time getting all these iterations, getting punched in the face to find the thing that actually works. And the likelihood that when you change the thing that actually works to something that's not that thing and that that other thing is going to work better than the first thing is low. And that's the crazy part. Think about this from a hypothetical perspective. If I have a building, right, I've got bricks all along each of the walls to create the building, right? There are unlimited places that those bricks could be in the physical world.

8:46They could be in China. You know, like I'm saying, like if I had a thousand bricks, brick number 999 could be in its exact place where it needs to be for the building, or it could be in unlimited other places. But only in one of those locations is it serving the purpose of keeping the building upright. And so oftentimes when we move bricks, what we're doing is the likelihood that the move that we have is going to take that brick from something that already works in the building to improving the strength of the building versus just being a Jenga block that we remove, we put on the side, we just put it across the street.

9:14and then we think that it's going to improve the building when in fact, the likelihood that when we change something that works, that it works better is usually significantly lower. And so I want to dovetail into kind of a third bigger idea here, which is features and bugs. I referenced it a little bit earlier, but I want to hit on it really hard. And to use the words of my great CFO, Suzanne, she said, all businesses have shit. All businesses have features and bugs. But I think one of the big mistakes is that founders believe that the feature is a bug when it really isn't. And so if you have, let's say, a service business, then you're going to be like, man, it's hard to find good people.

9:45I should change my business model. Well, people's the business. That's a feature. That's something that comes standard with the business. You're never going to eliminate it. It's going to be part of it. If you were like, man, I am a software company, then guess what the problem that you're going to have is? Finding good software developers. They're really hard to find and they're really expensive. And so you were going to still have to manage those people. Now, of course, there are problems in business that you can solve. It's just that there's a lot of businesses that you manage rather than solve.

10:12You never get through them. It's just like basically this pain of business that just, it's just overhead. It's just something that you have to keep paying. And so like, I feel like this is so important because this is what understanding this took me a very long time and you must do the hard thing. And a lot of the hard thing is basically withstanding the pain of knowing that there were mistakes being, you know, occurring in the business. There's churn that's going up. And if we had these people, we wouldn't have this churn, but I can't change the business because I'm actively getting those people.

10:41So you just have to sit there and watch it burn. You have to be okay with the flaws and it will drive you insane because as a person, you need to be the type of person who's not okay with flaws, but you have to be willing to deal with the flaws as they exist because you are already actively solving them. And you have to look at your team in the face and be like, yup, heard. And they're like, we're doing, there's all these fires. You're like, yup, understood. But what are we going to do about it right now? We're already working on it. Well, why isn't it done yet? It's in progress. What? What? It's in progress.

11:09Well, shouldn't we do this in the meantime? No, we're just going to continue. We're going to endure. We're going to persist. We're going to deal. And I think that season is the part that is the hard part. And the thing is, is that season is literally never ending because as soon as you, once, once you, you, you find your mechanics, you find your accountants, you find the software developers who are going to help you with your business, whatever it is, right? As soon as you find those people, guess what happens? Something else will break and you'll have some things that are fast fixes and you'll fix those fast.

11:41But some fixes are slow fixes. And the slow fixes are the one that are going to be the vast majority of your business career because the fast fixes are only there for a small period of time because you deal with the pain, you see the solution and you solve it. Done. Over. But then as soon as you go fast, fast, fast, slow, then you just got to stick with that slow one until it's solved. This is what makes it hard. And it's not that your business isn't scalable. It's that you want scaling to be easier. And that's the issue. Your business isn't broken. You don't need to change the business. You need to deal with the fact that solutions take time and that this might just be a feature of the business you're in.