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There are Four Types of Small Businesses. Which is Yours?

Penelope TrunkPenelope Trunk

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When I was a kid I worked at my grandma’s bookstore (until I got fired). By the time I graduated college I had worked at the store for a decade and I thought I knew how to run a business. But when the CEO I reported to years later asked me to write a business plan for a startup, I had no idea what I was doing.

There are four types of small businesses. It took me a while to learn that, but I quickly learned that a startup and a bookstore are really not similar at all. Each type of small business has different goals and different challenges. If you know which of the four types is yours then you’ll be able to make better plans based on more solid assumptions. Here are the four types of small businesses:

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1. Sole proprietor
This business has one person who is able to both make the sale and do the work. This setup is inherently limiting because it’s very difficult to scale. Sometimes a sole proprietor will hire freelancers, but in general, this business owner is self-sufficient. Examples: a real estate agent, someone who makes and sells web sites.
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2. Local
Like the sole-proprietor, this business has inherent limitations to growth. The local business might employ a few people, or even more than a few, but there is a limit to how large this business can grow because of the constraints of the local market. Examples: a day camp, a hair salon.

3. B2B
This business sells to other businesses (as opposed to consumers). The B2B shop can grow as large as the businesses it serves. Often these companies grow by making larger and larger sales. Examples: Cisco, Deloitte

4. High growth
We call these companies startups because the companies are growing so quickly that they have to be early stage — mature companies cannot innovate fast enough to grow as fast as a startup grows. A startup usually puts high-growth ahead of making a profit. Examples: Twitter, Uber

Of course all small business owners try to learn from other peoples’ mistakes so they don’t have to make the mistake themselves. We try to take each others’ ideas and improve on them. But be careful to compare yourself only to a company that is similar to yours. The Harvard Business Review points out that each company has different goals, and following a company with totally different goals than yours will get you off track quickly. However, finding a company like yours can show you best practices without a lot of trial and error, and that will save you a lot of time and money.

SmallBusiness1And now, a foray into weight loss: each person’s body has a weight set point. That is, the weight that your body gravitates toward if you don’t eat excessively or diet excessively. This is why it’s so hard to keep weight off after you lose it.

The same is true with businesses. Each business model has a growth set point. One of the hardest parts of being a small business owner is the feeling that you can always do more, build more, earn more. But not every business model can grow. My grandma’s bookstore, for example, could never have expanded to a second one. The business model was that my grandma and I had read every book in the store and were great at recommending books to customers.

On the other hand, some businesses don’t work small. Facebook, for example, never could have made money small. It had to grow huge to be profitable. The toughest call for small business owners is finding the set point of their business. And, if you don’t like the set point, instead of forcing something that doesn’t make sense, you need to change the business model.

The company I’m running right now, Quistic, began as a startup. Then I decided to homeschool my kids, and there was no way I could grow the company as fast as it needed to go to meet the demands of the venture capital community. So I negotiated with my investors to change the model of the company to make it a smaller, more manageable business plan for someone homeschooling their kids.

And therein lies the most important part of running a small business: make sure it works for your life. Fast-growth companies take over your life. (Believe me, I’ve been there.) And companies with a smaller business plan are more likely to bend to the needs of your personal life. Be sure you are running a small business that is going to give you the life you want.

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