I was listening to an interview on Intersections podcast where Robert Kaplan, the former President of the Federal Reserve Bank of Dallas, outlined his view on what drives economic growth. His answer was three factors: leverage, labor force growth, and productivity growth. He was talking about the U.S national economy. How we have exhausted leverage as a tool for economic growth, and growth in workforce is currently slow, therefore all eyes are on productivity growth (technology) as the driver of economic growth. The interview covered the long-term health of Gross Domestic Product (GDP), the constraints on growth at the macroeconomic level, A.I as a productivity catalyst and not necessarily a labor force detractor. He also discussed Dallas economic growth, global A.I trends and the future of the U.S economy. His 3 factors for economic growth were slightly different from textbook, and it sparked my curiosity. The moment I heard it, I thought: does this framework fit for business growth? Searchers and sponsors spend months underwriting deals. They model revenue growth, analyze customer concentration, stress-test cash flow. But they rarely frame the post-acquisition challenge the way an economist frames macro-economic growth. Given how tied a company’s fate is to the macro-economic environment, I think this is worth exploring. Let’s consider if the same three factors that constrain national GDP growth are the exact same factors that constrain whether a business grows or stagnates after acquisition. The Parallel First, let’s establish the parallels. GDP measures the total value of goods and services produced. The company equivalent of that is Revenue. Revenue measures the total value of goods and services sold. Both track the top-line volume of economic activity, not perfectly, but good enough for this exercise. Secondly, I’m working with the assumption that business acquirers are interested in growing the top line, as part of their bigger plan to improve enterprise value. Now, using the 3 factors of economic growth, we can say that growth in company revenue is driven by: Leverage: Does the business have leverage capacity to fund growth? Growth in labor force: Can you grow the labor force in the market you operate? Productivity: Can you improve productivity enough to increase growth without destroying margins? Just as with macro-economy, this framework is not about optimism or execution. It is about fundamental constraints. Factor 1: Leverage - The Capital Constraint Debt to GDP ratio in the U.S is above 100%, and interest expense is 15% of our national budget, greater than defense (13%). Debt as a source of economic growth is effectively constrained, crowded out. Debt is used to do more (research, infrastructure, healthcare etc.) today, instead of waiting till you have earned the funds. So, in a way, it accelerates the future, jump starts the economy. When debt is “too high” it ceases to be an effective catalyst for growth. Interest expense eats into the budget reducing funds available for research, infrastructure, healthcare etc, and sometimes the borrower begins to borrow more merely to service existing debt, then get stuck in the debt cycle. That’s the shift from productive leverage to defensive borrowing. For a business, debt gives you the ability to do more today – increase plant capacity, hire more staff etc. which could in turn increase your revenue. It also follows that an over leveraged company has little to no bandwidth for debt-powered growth. When you underwrite a deal, you should ask: What does free cash flow look like in a trough year, not an average year? If leverage capacity disappears in a downturn, your growth plan is fair-weather only How much of 'growth capital' is actually just maintenance capital in disguise? Especially in energy, manufacturing and industrial businesses, many new buyers assume all free cashflow is cash available for growth. For the business you are buying, does growth require step-function capital or incremental capital? Some businesses grow smoothly with small capital additions (incremental capital, can typically be self funded). Others hit walls where growth requires a large discrete investment. What happens to working capital as revenue grows? Your growth plan is only viable if you have leverage capacity to fund it without further financial distress. Factor 2: Labor Force Growth - The Talent Constraint In macroeconomics, labor force growth comes from adding more people (Quantity) or/and upskilling the existing workforce (Quality/Human Capital). This translates perfectly to a corporate hiring strategy. Headcount Growth (Quantity) and Worker Talent (Quality). Headcount growth is a linear growth strategy. If an agency wants to take on more clients, it hires more account managers. If a factory wants to run a second shift, it hires more assembly workers. GDP (Revenue) increases, but output per worker stays flat. Worker Talent is an exponential growth strategy. Hiring highly skilled workers or investing heavily in training allows employees to solve harder problems, build better products, and command premium pricing. Labor’s contribution to revenue growth is not as straightforward. There is diminishing returns on labor. If you have a farm with only two tractors (Capital/leverage), hiring two drivers makes perfect sense. Hiring a third and fourth driver might help with maintenance or shift rotations. But if you hire 50 drivers for that same farm, they will eventually just stand around with nothing to do. Total food production stalls out. When you are underwriting a deal and thinking through labor as a source of growth, consider these questions: Is the constraint hiring, or is it that this specific labor doesn't exist in this market at a price that works? There's a difference between "we haven't hired" and "the qualified people don't exist here." A business needing certified welders in a rural basin faces a different constraint than one needing account managers in Dallas. Validate the actual labor pool depth, not just the org chart gap. How long is the productivity ramp, and who trains during the ramp? In some cases, growth via hiring temporarily reduces productivity before increasing it. What is the revenue-per-employee ceiling in this business model, and how close is the business to it? Does adding this role require adding supporting roles? Growth in one function often forces growth in others. Underwrite the full labor cascade. Factor 3: Productivity - The Efficiency Constraint Economists often describe productivity as getting more output from the same amount of input. In the context of GDP, it means producing more goods and services without proportionally increasing labor or capital. It is why technology has become such an important topic. If the labor force is growing slowly and leverage is constrained, the only remaining way to sustainably expand the economy is to make each worker more productive. Same logic can apply to a business. Once leverage reaches prudent limits and labor growth begins to experience diminishing returns, productivity becomes the primary engine of sustainable growth. At both the national and corporate level, the long-term winners are often those that consistently find ways to produce more value without proportionally consuming more resources. For an acquirer, this is often the most attractive source of growth because it tends to improve margins alongside revenue. A manufacturer that reduces machine downtime can produce more output without buying another production line. A field service company that optimizes technician routing can complete more jobs each day with the same workforce. In each case, revenue capacity increases while incremental costs grow much more slowly. This is why I found Robert Kaplan's comments on AI particularly interesting. He framed AI primarily as a productivity catalyst rather than a labor force replacement. The long-term value of AI may not be that it eliminates employees, but that it allows each employee to accomplish substantially more and causes clients to demand more! Productivity is less tangible so difficult to underwrite. It lives in workflows, systems, management quality, technology adoption, and organizational culture. Two companies with identical financial statements and headcount can have vastly different productivity potential. Some questions worth asking include: Is low productivity a problem or an opportunity? A business already running at peak efficiency has no productivity upside, you are paying for optimization someone else captured. A business running inefficiently has embedded upside IF you can execute. Why hasn't the current owner already captured this obvious productivity opportunity? The reason productivity is low tells you whether you can actually improve it. As my friends say “that there is a gap in the market doesn’t mean there’s a market in the gap. Does the productivity gain require behavior change, or just tool change? Anyone that’s lead ERP implementation knows that buying software is easy. Getting technicians to use it is hard. Discount productivity gains that depend on changing how people work. What is the payback period on the productivity investment, and can I fund it during the payback? Execution risk - does management have bandwidth and capability to drive productivity improvement, or just maintain operations? Conclusion: When we think about growth, we often focus on strategies. Enter a new market. Launch a new product. Hire more salespeople. Raise more capital. Adopt AI. Those are all valid initiatives, but they come after a more fundamental question: what is actually constraining growth? Robert Kaplan's framework provides a useful lens because it shifts the discussion away from ambition and toward constraints. At the national level, an economy grows through leverage, labor force growth, and productivity. My view is that the same logic applies remarkably well to businesses. A company's growth plan ultimately depends on three questions, which should be top of your mind as you think through an acquisition: 1. Does it have the financial capacity to fund growth? 2. Does it have access to the people needed to execute that growth? 3. Can it generate more output from the resources it already has? If the answer to any one of these is "no," growth becomes significantly harder, regardless of how compelling the strategy appears on paper. For business buyers, searchers and sponsors, this offers another way to think about underwriting. We spend considerable time evaluating historical financial performance, customer concentration, working capital, and EBITDA quality. Those remain essential. But perhaps we should also underwrite the business's “capacity for future growth over the next decade” through the lens of these three constraints. That, I think, is where Kaplan's framework becomes useful for those of us not driving national economies but steering businesses.