Norm Brodsky on Expanding Upmarket
I own an industrial staffing agency that I bought from its founder. For more than 50 years, he focused exclusively on the low end of the labor market, finding unskilled temporary employees for his customers. I'd like to expand the company and turn it into a one-stop shop that would provide a full range of employees, from laborers to professionals. I'd greatly appreciate any help you could give me in figuring out how best to do this.
-- Scott J. Zimmer, president
AAA Labor, Minneapolis
In general, I like to encourage people to expand their businesses, but I needed to know more about Scott and his business before offering an opinion, so I gave him a call. It turned out that he'd bought the company in November 2007, about a month before the start of the recession, financing the deal with both a home equity loan and an SBA loan. Since then, sales have dropped about 25 percent -- from about $2.6 million to about $2 million -- but the company has held on to most of its customers and is still processing 80 to 130 invoices a week, while continuing to make regular payments on the loans.
Having weathered the worst of the downturn, Scott figured it was time to focus on developing new sources of revenue. He already had several Fortune 100 companies as customers. He saw no reason he couldn't offer them skilled employees as well as unskilled ones. He just wasn't sure about the order in which he should do things. Should he work on building the unskilled side of the business before expanding into a new area? Should he acquire another temp agency that already handled skilled employees or that offered a full range of skills?
In evaluating someone's growth plan, I want to know, first, how well the person understands his or her business. Scott had had two and a half years to learn about industrial staffing, and his ability to get through the recession with minimal damage told me he'd used the time well. He had evidently concluded that the unskilled side of the business had limited growth potential. Otherwise, he would be focusing his energy there. So it made perfect sense for him to expand into providing skilled temps to customers. The question was, How?
I told him that if I were in his shoes, I wouldn't acquire another agency. "When you buy a company, you're buying an unknown," I said. "I'm sure you've had a surprise or two with this company, haven't you?" He just laughed and agreed. "So why open yourself to bad surprises when you already have staff and good customer prospects who've been doing business with your company for years?" I did suggest, however, that he think about hiring someone with experience in the skilled-employee end of the business.
Cash flow could be a challenge, as I knew from my own experience in the temp business. (I'd dabbled in it during the 1980s.) You usually have to pay your temps before you get paid. So I cautioned Scott to take care not to outgrow his capital as he expanded.
I also suggested he avoid using the phrase one-stop shop. Customers look for expertise. You don't want to come across as a jack-of-all-trades and master of none. It would be better for Scott to portray his company as expert in two fields. Other than that, I thought his plan was sound.
"Perfect," Scott said. "But what's the next step?"
I told him that I would go to my best customers -- the ones who really loved my service. I would explain what I was doing and ask them to give me a break by trying me out in this new area. "You get two benefits by having them as your first customers," I said. "No. 1, you'll get a better education. You're bound to make mistakes. Customers that know and like you will be tolerant and help you learn the right lessons. No. 2, you'll be able to use them as references in the future."
NORM BRODSKY | Columnist
Street Smarts columnist and senior contributing editor Norm Brodsky is a veteran entrepreneur who has founded and expanded six businesses.