Bigger is better, right?
While Chenmark is a relatively new entity, the companies we acquire are not. Typically, the companies we work with have been around for decades. Similarly, while Chenmark’s consolidated revenue has seen very high growth since inception due (primarily) to acquisition activity, that is not the case for most companies within Chenmark.
Some of our entities have a clear growth path, while others are more limited in their growth potential, either due to geographic or market constraints. These are what we refer to as bait and tackle shops. They earn above-average returns on capital but have nowhere to reinvest that capital at similarly high rates of return. As standalone assets, investors don’t like these businesses. After all, they can’t scale! At Chenmark, we love these types of businesses. Their ability to generate consistent free cash is delightful, and we have created the ability to put that cash to work in our growing collection of companies. Similarly, for those who want professional growth, we have an ever-increasing number of opportunities within the Chenmark network.
Given this experience, we enjoyed reading a recent Seth Godin blog on scale:
“Successful small businesses often stumble when they seek to get to an entirely different scale.
It’s easy to believe that things are dramatically better when there’s more.
More customers, more employees, more market share.
And it’s easy to believe that getting to the next sustainable level is simply the result of efforts similar to the ones that got you here.
But neither is true.
Between this level and the one you seek there may be a slog that’s longer, more difficult and more expensive than it appears.
Staying at a scale that’s working isn’t a cowardly copout. It might be the single best way to do work that matters for people who care.
And if you choose to get through the Dip, consider whether you have the resources, the patience and the team to get to the other side.”
As owners and operators, we wholeheartedly agree with Godin that forcing a company to grow for the sake of growth is not a good long-term mindset. Thankfully, as a collective, we can grow naturally without forcing any one company into this predicament. We view this as an elegant solution to the scaling dilemma Godin poses. For Chenmark, we have always had the patience, and with each new company, we continue to compound both our resources and our team.