*Almost all security guardcompany owners have aspirations that their company will some day be a majorforce in the industry. But few getthere. They fall victim to a force thatlimits the owners; ability to expand the company. It’s silent and invisible. It’s a force that pushes the ownersdown. It’s a point that no matter how hardthe owners try, they cannot get past. Ithas to do with the glass ceiling effect; and just how high this ceiling isdepends on the owners’ management abilities and degree to which they arewilling to accept risks – a fact that usually is not realized until the companyhas lost value.
JamesGordon, the majority owner of Protective Services, Inc., based in Dallas, firstcalled our office on March 3, 1994. Hestarted the conversation by talking about establishing a relationship with ourfirm so that we can follow his continued success. When he reached his sales volume goal, hewanted us to manage the sale of his company.
Jameswas ambitious. He paid his own waythrough college by working part-time for a national security guardcompany. He came to like the securityguard business. When he graduated in1985, and with the financial help of his family, he started his own securityguard firm.
In9 years, he had grown the company to an annual volume of over $15 million, withoffices in 4 major Texas cities. Hislong-term business plan was aggressive, and called for 20% growth. He would sell the company when he reached $50million in sales, which he anticipated would happen in about 7 years.
Hecalled our office regularly over the years that followed. The conversation topics were about all thegood things happening to his company. When he called in 1997, his volume was $24 million, not quite in linewith his plan, but close and still very respectable growth rate. He had now moved into a couple of surroundingstates and was making a good profit. Hehad a lot of proposals out and was sure he would get 90% of them, which wouldbring his volume to $28 million shortly.
Whenhe called in July 1998, he said he didn’t win most of the bids we talked aboutin our last conversation. He had somegrowth, but also lost several accounts to his low billing-rate competitors. Nonetheless, he was still enjoying runninghis company.
Hewas a hands-on owner/manager. Heinvolved himself in all the aspects of running the business; after all, wasn’tthat the real reason he had been so successful? He was beginning to spend a lot of time with paperwork dealing with theincreased government regulations put on businesses.
Healso spent much of his time upgrading the computer systems, and helping thehuman resources department, which was having trouble finding qualifiedpersonnel. He regretted that he didn’thave time to visit his accounts as often as he used to. Those day-to-day distractions kept him fromspending time developing his marketing efforts.
Hissales were now $27 million . . . farless than the goals established 4 years earlier. “But I’m going to really start growing” saidJames. “The customers of the ‘majors’(national security guard companies) are calling me on a regular basisrequesting proposals.”
Jamescalled us several more times expounding on what was just over the horizon, buthis sales volume stayed at the $25 million mark and sometimes dipped to lesseramounts.
Thelast call James made, which was about two weeks ago, ended on a more sombernote. His competitors were making itincreasingly harder for him to make a profit. They were approaching his accounts with the promise of lower billingrates and the accounts in turn, were looking to Protective Services, Inc. tomatch the bid.
Ifhe lowered his rate, he would have to cut operating costs, which would mean thathe would have to install yet another more powerful computer system, one thatwill give him frequent job profitability reports. A new computer system would cost over$100,000. The computer company wanted afinancial commitment before it started work and James didn’t have the fundsavailable.
Jameshad also become aware of some very fundamental economic principles that relateto bringing on new accounts. Jamescommented that . . . “I’ve come to learn that the securitybusiness is cash intensive. Since we paybi-weekly and it takes 45 days to turn our invoices into cash, every time Itake on a new account, I have to have enough money in the bank to cover atleast three payrolls.”
Inorder to buy the computer and bring on new accounts, James would have to askthe bank for an increase in his credit line. The bank was considering it, but needed James and his wife to put upmore of their personal assets as collateral. James already had to put some of his personal funds back into thebusiness to keep it running. He didn’twant to keep taking those risks, and managing the business wasn’t funanymore. He wanted to sell the company.
Jamesadmitted that he should have sold his company back when his growth trend washeaded up and was more attractive to a buyer.
JamesGordon and Protective Services, Inc. are fictitious names. However, the plight of James and his companyare very real and one shared by owners of most privately-held companies.
Whenthey start their company, they have a plan. The plan may have grandiose proportions that call for the company to benational or international, or it may be a more modest plan that calls for thecompany to be a regional or local leader. The plan may be written, as in James’s seven-year formal plan, or may bejust an idea sketched in the mind of the owner/entrepreneur, but nonetheless itis still a real plan.
Whetherthe plan is a success or a failure depends on the leadership qualifications ofthe owner, as well as the owner’s tolerance of risk. As we will see in this article, about 95% ofthe owners of privately-held security guard companies unfortunately do notreach their goals.
Insteadthey reach a point where their growth is greatly curtailed, levels off, or thecompany starts to actually lose volume and profits. Most owners do not recognize when it hasarrived; hence it’s called the “glassceiling” on growth.
It’salso important to note that the company may be growing, but still have reachedits glass ceiling. It’s only the quality sales that count when determininga company’s real growth. Some owners, inthe anticipation of a sale in the near future, will put on a sales campaign tojust bring in accounts. The accounts maybe of a lesser quality and margin than the company’s normal accounts. In that case, the company reached its glass ceiling when it stoppedbringing in accounts consistent with its normal standards.
Companiesare started by entrepreneurs. They areambitious. However, such ambitions oftenexceed their capabilities. Most have aneed to be in control, which limits their ability to properly delegate, a veryimportant aspect of growing and managing a company.
Eventhough entrepreneurs take risks, which is another important characteristicneeded to grow a company, there’s a limit on how much risk they will accept,since it usually involves their personal assets.
Notall owners have the same level of management skills and tolerance forrisk. Therefore, the glass-ceiling concept cannot bedescribed in terms of a definite size.
Toquantify the numbers ofprivately held companies that are victims of the glass ceiling, consider this: most reliable sources indicate that there are between 10,000 and 12,000security guard companies in the U.S., and that this market represents $15 – $17billion in annual sales. Sources alsoindicate that approximately 20 companies have sales exceeding $50 millionannually. We estimate that there areless than 50 companies with sales over $10 million annually; which means that95% of the total number ofsecurity guard companies have sales less than $10 million.
Whilethese statistics only pertain to the U.S. market, a large percentage of thesecurity guard companies in foreign markets are victims of the glass ceiling since these markets arehighly fragmented as well.
Perceptiveowners, although very few in number, recognize when they’ve reached their ceiling. To them it’s not a silent, invisible forcekeeping them from their goal. They knowtheir limitations and are aware when they’ve reached them. They also understand the buyer’s viewpoint inevaluating their company. They know thatone of the important characteristics a buyer looks for in a purchase candidateis the company’s sales growth trend.
Anupward trend indicates that the managers, who will be a part of thetransaction, are well-trained and still motivated to continue this growth intothe future. Buyers see this as avaluable asset accruing to them after the purchase, and they definitely takethis into consideration when arriving at an offering price for the company.
Asone may conclude from this article, the glassceiling effect, although limiting to the owner/entrepreneur, should be anecessary factor in the owners’ decision on when to sell. The owner should realize that the skillsneeded in starting a company are different from those required to run a largeorganization. Neither set of skills isgreater or more important than the other – they are just different. It takes the entrepreneurial skills andtolerance for risks inherent in the owner to start a company and take it to acertain point. But when the companyreaches this point, it should be sold to a larger company with the financialresources already in place and run by executives with skills, quite unlikethose of the owner/entrepreneur, needed to work within the often frustratingframework of the larger organization. These are the necessary ingredients for taking the owners’ company tothe next higher level.