A Radical, Tactical Shift in Strategy for an Everest Swim
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Lewis Pugh is an environmental activist of the most creative order; the man knows how to get attention for his cause…
Pugh failed in his first attempt to traverse this recently formed lake near the top of Mount Everest. The bulldog tenacity Pugh obtained in the military worked well for his swim at the North Pole a few years ago; but it failed him dramatically at an elevation over 15,000 feet. His Sherpas, nomads who had for years experienced the harsh reality of Everest, encouraged Pugh to abandon his previous strategy of aggression and anger in lieu of a more emotionally controlled approach. Pugh attempted the swim two days later, this time with a radical shift in his tactical approach. He prevailed.
All Entrepreneurs inevitably face a challenge of similar magnitude in the second stage of company growth, but this time their “lake” has no bottom. My partner, Doug Tatum, coined the phrase No Man’s Land, to describe an inevitable transition when companies are too big to be small and too small to be big. Entrepreneurs usually approach No Man’s Land with the same confidence, aggression and attitude that Pugh exhibited in his failed attempt. Their companies are growing, certainly the preferred status but also a condition that can produce false confidence. Growth can actually generate the greatest illusion and diversion for CEOs from the hidden danger they will face.
My partners speak to scores of CEOs around the country about the realities of No Man’s Land. Thirty minutes into our discussion, jaws drop and heads nod. “That’s my company!” one states, “I’m there!” They also find it fascinating that No Man’s Land holds no favorites; it’s an industry neutral transition that produces confusion and indecision.
Surviving No Man’s Land requires a radical, tactical shift in company strategy relating to assessment, investment and decisions. Even if what I’ve just described does not send a quart of adrenalin through your entrepreneurial veins, and even if you’re convinced your company has your market segment by the tail on the downhill grade, let me serve as your pro-bono Sherpa for the perilous swim your company will eventually undertake. You’ll be glad you brought me along; because unlike Pugh, you can’t decide mid-swim to plant your feet on the bottom of No Man’s Land.
Economy Heroes – the Freedom Fight for Entrepreneurs
In his fascinating and sobering book, the 4th Turning, William Strauss chronicles patterns in America’s economic history. He describes these patterns as cyclical “Turnings” that have occurred in our economy since the first ringing of the Liberty Bell:
- A High
- An Awakening
- An Unraveling
- A Crisis
Although The 4th Turning was published in the mid 1990’s it received little attention until 9/11, when many took notice of how that disaster fit into the 4 turnings, specifically the 4th. In the author’s opinion we are currently in the Crisis Turning, and could be for the next decade. But there is good news.
The good news is that “heroes” have surfaced in every 4th turn to rescue the economy from collapse. The last 4th turning occurred in the Depression when The Greatest Generation stepped in, not only to emerge victorious in a World War but also to rebuild our economy with initiative, innovation and guts.
Our country needs a “re-tweet” of the Greatest generation; men and women with the tenacity of my favorite uncle, Charles Harbin – known to friends and family as “C.W.”. He passed last year after a long battle with a debilitating back disease. But even with pain that would force a rhino to its knees, C.W. was the mentally toughest individual I’ve known by far. I loved hearing him tell stories over the years of his youth – growing up on a farm in a small Florida community during the Great Depression. Jobs were scarce and his choices were limited which required intense focus and bull-dog perseverance.
His father handed him $150 on the night of his high school graduation then told his son he wished he could give him more, reminded him that his father he loved him, and wished him luck. C.W. caught a ride to the University of Florida that night with the professor who gave his graduation address. The professor dropped him off on the outskirts of town and also wished him luck. C.W. found cheap lodging and showed up at a local dairy the next morning looking for work. No jobs were available, but he committed to working at no pay until a job opened. He worked without compensation for three months.
For the next four years C.W. started work at 5:00 a.m., went to class in the afternoon, and studied at night. He joined the Marines the day after graduation because the job market was still tight and he wanted to serve his country. He fought in the Pacific campaign, including Okinawa. After the war he farmed tobacco and built enough capital to diversify. In time he became independently wealthy as a commercial developer. He employed many, help many, and was considered a pillar of his community.
We need another wave, make that a tsunami, of heroes like my uncle – men and women with the courage and tenacity to step in to our economic war so that we can push through this Crisis and drift (as in racing) into the next “High”.
Here’s more good news. Our heroes have already surfaced:
No, Captain America and Wonder Woman can’t save the day – as cool as that might sound. Our heroes are those who are working 24/7 to fuel this economy with jobs and great ideas; those who are taking risk to beat the odds of failure. These crazy, courageous innovators are our Economy Heroes… our Entrepreneurs. Entrepreneurs generate jobs, Washington can’t. Entrepreneurs are our nation’s only hope to survive fiscally in the next decade.
The term “Economy Heroes” is not only a nom de guerre for our entrepreneurs, it is also a movement – a freedom fight for entrepreneurs. Economy Heroes is a “Starfish” organization, as defined in Ori Brafman’s book The Starfish and the Spider. It’s distinctly decentralized in order to draw on the power of champions and catalysts from coast to coast who will push beyond Washington’s antics; and who will find new solutions that will fuel and motivate the success of those who are part of America’s competitive advantage in the world economy. Our heroes need ideas, information, events, etc., to move the needle on their success. The Economy Heroes movement was created to funnel those resources to entrepreneurs around the country.
The Economy Heroes Manifesto
In the early 1900’s immigrants flooded into Ellis Island with hopes of grasping the brass ring of freedom. They journeyed from all points to pursue dreams and launch their own business. Our ancestors offered every ounce of their innovation forged with an unyielding work ethic to initiate a movement of what we now recognize as our nation’s competitive advantage – our entrepreneurs. They were then and remain today America’s Economy Heroes.
We’re in the sharpest economic downturn since the Depression. Big business can fail, we know that now. Mega corporatations struggle to remain in business. We depended on them, invested in them and placed our confidence in them even though they (companies over 5,000 employees) generated only 2.2% of the jobs in this country.
Small businesses fail too. In fact over 90% of entrepreneurial companies don’t make it, even though the less than 10% that do survive generate over 80% of employment and almost all innovation. These CEOs take risk to advance their ideas and fuel our unique cultural environment that enables entrepreneurs to march “North” while every else is marching “South”. They are not corporate “rock stars” like Jack Welch. Their stories are not as legendary as SouthWest, FedEx, or Walmart – yet. Economy Heroes are more important now than any other time in our history. They need attention, not bailouts.
What will turn the current economic tide? Our labor cost? Our engineering? Our science? Wall Street and Washington can’t move the needle. The market plummets like a millstone in open water. We watch the 24/7 news stations with sweat streaming from our pores as we internalize the dramatic blow by blow anchor blather. We fantasize the worst, and our political leaders react with one “magic trick” after another; hoping something friendly will appear and be embraced.
We must elevate awareness and provide support to our Economy Heroes. All entrepreneurs eventually face “No Man’s Land” (a term formed by Doug Tatum, author of No Man’s Land: A Survival Guide for Growing Midsize Companies). No Man’s Land is an inevitable “adolescent” stage of corporate growth where most companies fail. Corporate adolescence often produces agonizing battles between the habits of a lonely entrepreneur and the immutable laws of growth. The result is often confusion, frustration, stagnation, and loss of employee morale.
Our heroes face huge obstacles; they require essential information, accountability, capital, and political support to succeed. If they thrive, our economy will survive. Like the courageous immigrants of old, our Economy Heroes provide the fiscal hope for our present and future. They are America’s competitive advantage. It’s that simple.
Even if we are in the 4th Turning Crisis stage of our historical economic cycle, we need not fret; all we need to do is to pave a clear path for our Economy Heroes and let them do what they do best – CREATE JOBS!
Unique is a Relative Term for Many Companies
I’ve worked with over 200 companies in the past twelve months. I used the new Inc. Compass as my analysis engine for all of these businesses, an online experience that generates a concise and comprehensive report on the company. When asked to respond to the question, “What is our company’s unique competitive advantage?”, leadership team members almost universally provided varied and often rambling statements. These companies did not know how to communicate their product’s primary value to customers, which means they did not have an economic model in place to scale that value, which also means they probably lacked an accurate assessment of the funding required to grow.
Listen to my partner Doug Tatum describe the necessity of a scalable Value Proposition:
This might not shake you, but if a company is not aligned on a unique and scalable value proposition, it’s shouting – “We don’t know why we’re in business!” If “unique” is relative term when it comes to your value proposition, you might want to schedule a meeting with the leadership team and brew some Storyville coffee (www.storyville.com); you’re going to be there a while.
Give me a call. I’ll bring the Inc. Compass; we’ll lock and load on what makes your company unique. And please save me a cup of Storyville.
The Best Way to Fail
I know failure doesn’t scare you, but just in case you were wondering – here’s the best way to fail, and it will surprise you:
Would you have guessed that the best way to fail is to grow? Growth can produce failure, UNLESS you’ve created a scalable value proposition and model that enables the company to do what you as CEO do best.
Forget the tax HIKE, Take the Bridge
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I want to repeat that you, Ms. and Mr. Entrepreneur, are our nation’s competitive advantage; you are our Economy Heroes (@EconomyHeroes). The idea of forcing a tax hike on entrepreneurs in this downturn is the most whacked disincentive one could possible envision:
Tax Hikes for the “Rich” – Can We Afford Them?
Why create a tax hike, when what Economy Heroes really need is a tax “deferral” that costs the tax payers nothing but gives the business owner a bridge to traverse the capital gap of second stage growth. My partner, Doug Tatum, constructed a bill that is sitting on our presidents desk which, according to a study done by the Kaufman Foundation, could generate over 600,000 jobs. It’s called The Bridge Act:
The Bridge Act
There are several “overlooked” legislative opportunities to help move the needle on entrepreneur success. The Bridge Act, a tax deferral proposal for entrepreneur business that, according to the Kaufman Foundation, could generate at least 600,000 jobs. Here is some interesting FAQs about this little bill that carries a huge punch.
Q: When is a rapidly growing business in “No Man’s Land” for capital funding purposes?
A: First, when the firm’s financing needs are within the “capital funding gap” of $250,000 to $1,000,000, it is very difficult and costly for growing, small businesses to obtain external funding. Second, when the return on assets is less than the rate of revenue growth, the business cash flow becomes negative under accrual accounting even though the business may be profitable and owe income taxes.
Q: What happens if a business fails after deferring income tax?
A: A bankrupt business generally does not have net income tax liability because of accumulated losses, but if so, it would be collectible (as under current law) against business assets or personal assets (in the case of a proprietorship, partnership, or S corporation). C corporations (and proprietorships with Schedule C business income) currently have a 5-year net operating loss carryback that may be used against outstanding tax deferrals. For S corporations and partnerships, any outstanding tax deferral when the business entity dissolves would be collectible against the shareholders or partners for their pro rata share of the net tax liability (as under current law).
Q: What tests must be met to qualify for the tax deferral?
A: The business must have a growth of 10% or more above the average annual gross receipts for the prior 2 years. A business meeting the growth test and using accrual accounting for tax purposes with $10 million or less in annual gross receipts would be eligible for the tax deferral.
Q: Would it be possible, using gross receipts data, to manipulate the growth figures to qualify?
A: Not likely, since the current year’s gross receipts must be 10% or more above the average gross receipts for the prior 2-year period.
Q: How much Federal income tax deferral is authorized under the proposal?
A: The aggregate tax deferral is limited to $250,000 for each business entity, or a lesser amount should the business exceed $10 million in gross receipts in the meantime. Partners of a partnership or shareholders of an S corporation would be limited to a combined total of $250,000 of tax deferral for each entity.
Q: When is the tax deferral amount paid?
A: Each year’s tax deferral amount may be deferred for 2 years; payment of deferred tax may be made over the following 4-year period. Interest (Federal underpayment rate) is payable during the entire deferral period. Upon the sale or merger or cessation of a business, any remaining tax deferral would be payable at that time. Being “acquired” would include the sale of 80% or more of the firm’s assets.
Q: How does the IRS ruling on cash accounting affect businesses eligible for the tax deferral?
A: The Bridge Act only applies to growing businesses on accrual accounting. Growth businesses need to be on accrual accounting to obtain outside financing and to have outside audited financial statements. The IRS ruling increasing the cash accounting gross receipts limit to $10 million generally applies only to service businesses; it does not apply to C corporations with average annual gross receipts of more than $5 million.
Q: Is the tax deferral a loan guarantee by the U. S. Government?
A: No, it is not a “loan guarantee,” as the Federal Government would not be guaranteeing any loans made by a financial institution to the business. The Federal Government has established a number of loan guarantee programs, e.g., by the Small Business Administration, Federal Housing Administration, Veterans Administration, and others.
Q: Is the tax deferral a loan by the U. S. Government?
A: A “loan” means that additional capital is contributed into the business from an outside source, with required payback regardless of whether the firm is profitable or unprofitable. The Bridge Act, however, simply adjusts the timing of an obligation to the Government created when the firm is profitable–it does not provide added funds from the Government. The tax deferral can be offset by business loss carrybacks or carryforwards.
Q: Are other sources of capital readily available to small, emerging growth businesses?
A: Very few, and generally only to the most promising and well-connected businesses. The lack of capital funding is most urgent for growing, small businesses with funding needs between $250,000 to $1,000,000. Funding needs below $250,000 generally are available from family, friends, credit cards, home equity credit, and banks (personal credit basis). Funding needs between $250,000 and $1,000,000 may be available from so-called “angel” financiers, “factors,” and in limited cases from SBA loan guarantees and SBICs that have met certain capital requirements. When a business reaches a $1,000,000 funding level, it generally has a much better opportunity to attract capital funds from traditional sources. A profitable $10,000,000 or more gross receipts level is more likely to support an asset-based loan from banks and other financing sources.
Q: Are there venture capital or private equity sources of funds for small, emerging growth businesses?
A: Usually not. As the venture capital and private equity industries have grown, their investments generally are well above the $1,000,000 funding level.
Q: What is the revenue cost of the tax deferral proposal?
A: The introduced bills (H.R. 3062/S. 1903) would sunset the tax deferral after 4 years. The Joint Tax Committee estimates that this proposal would result in revenue “losses” for the first 4 years, which would be more than offset in the next 6 years–for a net gain of $1.1 billion over the 10-year budget period.
Q: Why should Congress enact this tax deferral proposal?
A: Macro-economic research by Cognetics, Inc. and the Kauffman Center for Entrepreneurial Leadership along with other economists have documented that the major force behind the net job expansion in the U. S. over the last decade has been from smaller and mid-sized growing companies (principally, those with fewer than 100 employees). These growing, entrepreneurial companies are fragile as they try to obtain sufficient capital and other resources to survive the “No Man’s Land,” bridge the “capital funding gap,” and become big enough to attract adequate outside financing at a reasonable cost to keep growing and providing expanding job opportunities.
Q: What are the benefits of the tax deferral proposal for emerging growth businesses?
A: First, the proposal will benefit thousands of emerging growth businesses with $10,000,000 or less in gross receipts, which will help the U. S. economy to grow and expand job opportunities, with the potential of creating up to 641,000 new jobs in the first 3 years. Second, the proposal is neutral as to the types of businesses that will benefit (businesses are eligible, whether capital-intensive or services, if they meet the growth and sales tests). Third, the proposal is a tax deferral, payable with interest, thus minimizing the long-term revenue cost. Fourth, the proposal will provide emerging growth businesses a source of needed capital financing when few outside sources are readily available at an affordable cost.
Q: What is the effective date of the proposal?
A: [NOTE: The BRIDGE Act was originally introduced in the 102nd Congress. The effective dates of the proposal would need to be updated so that the tax deferral would be effective for a new 4-year period – for taxable years 2009 – 2012.]
Why create a tax hike, when what Economy Heroes really need is a tax “deferral” that costs the tax payers nothing but gives the business owner a bridge to traverse the capital gap of second stage growth. My partner, Doug Tatum, constructed a bill that is sitting on our presidents desk which, according to a study done by the Kaufman Foundation, could generate over 600,000 jobs. It’s called The Bridge Act:
Tax hikes might not be scary, but capital gaps ARE frightening for companies about to enter No Man’s Land.
The Adrenalin Grass of Company Growth
Author and physician Donald H. Hilton described an interesting observation he experienced with his family on a safari in Africa:
While on a game drive along the Zambezi River, our ranger commented on the adrenaline grass growing along the banks. I asked him why he used the word “adrenaline,” and he began to drive slowly through the grass. Abruptly, he stopped the vehicle and said, “There! Do you see it?”
“See what?” I asked. He drove closer, and this also changed the angle of the light.
Then I understood. A lion was hiding in the grass watching the river, just waiting for some “fast food” to come and get a drink. We were sitting in an open-air Land Rover with no doors and no windows. I then understood why it was called adrenaline grass, as I felt my heart pound.
For the moment, let’s change the angle of light slightly on your business. Have you considered the possibility of danger lurking in your company’s growth enough to make you heart pound?
A few months ago I consulted with the CEO of a fast-growing product company in the online gaming industry. His business had developed a cool wireless device for the World of Warcraft addicts. After engaging in the 4M online experience, his X-RAY report exposed an interesting, but all too common revelation concerning the future growth of his company. Here are the benchmark results of his business compared to 400 competitors nationwide in our database:
Remember that 1500 foot ravine every business has to hurdle in its “adolescence”? Here it is in blue and white. Although my client currently experienced excellent growth, he immediately recognized that his EBITDA would drop dramatically in next three stages of revenue.
No Man’s Land is a stage that requires increased capital to fund growth – both physical capital, and human capital (new management) in order to access the higher profitability of subsequent revenue zones. My client knew he had an immediate decision to make: pull back on the reins and wait out the recession, or seek private equity to fortify his growth through the next three stages. He chose, as Economy Heroes often do, to throttle up!
This financial “ravine ramification” occurs with almost all companies, industry neutral. My client was fortunate enough to see through the adrenaline grass before he walked into it.
How’s the angle of light on your company’s growth? I know, you don’t scare, but don’t wait too long. Once you hear the growl, it’s too late.
Why are so Many Adolescents in No Man’s Land?
The reason is: No Man’s Land is the home state for all business adolescents. I only described half the story when I stated that over 90% of all companies fail; I know, I know you don’t scare that easy. The “rest of the story” (as Paul Harvey used to say) and the Freakonomics of the reason behind such an outlandish percentage, is what my 4M Navigator partner, Doug Tatum describes in his best-selling book as No Man’s Land:
It’s adolescence, the stage we all go through when we’re too big to be small and too small to be big. We’re confused and unfocused, and we’ve got significant transitions ahead that are hidden like mines in a minefield. Imagine your business is a Ferrari 575 M Maranello. You’re plowing down the Autobahn at 145 mph and you’re increasing speed. Here’s the good news: you’re driving the vehicle of your dreams, you’re moving at a fast and reckless rate, and the road is clear. The bad news: there’s a 1500 foot wide bottomless ravine hidden in the fog about ¼ miles ahead. Are you ready to jump it? We should call this chasm DeadCo Drop because all companies must, at some point in the second stage of growth, jump it.
I’ll discuss DeadCo more in my next post, even though I know a bottomless drop doesn’t scare you.
Brent Sapp
