Two ways to grow
Generally, there are two ways to grow a company. An owner can grow a company organically by increasing the client base through marketing. Or the owner can grow through acquisition by purchasing competitors. Organic growth is often slower but less risky. Growth by acquisition can provide quick growth but is often risky.
Organic growth is generated by investing in marketing and sales strategies designed to increase a customer base. Growth is usually incremental, which often gives a company time to adapt. Consequently, the owner can monitor the effectiveness of the strategies and modify them as needed.An added benefit is that the owner can always stop any strategy that is not working—for example, one that is attracting the wrong type of client. An owner can simply stop the marketing and sales campaign. This control helps the owner limit potential damage to the business. Lines of credit, as mentioned in the previous section, work very well to support this strategy.
Growth by acquisition
Growth by acquisition is complex. Acquisition involves purchasing the clients and, often, the resources of a competitor. The benefit of this strategy is that an owner can literally grow a business overnight. Unfortunately, this overnight growth is also the main drawback—especially if the business is not well prepared or if an acquisition is not as good as the owner originally thought.Most companies that acquire another business use two types of financing. First, they use an acquisition loan to handle the purchase of the business. Then, they use a line of credit to complement cash reserves and handle any working capital needs.
The U.S. economy has been in a period of sustained growth for several years. Unemployment is at its lowest level in over a decade. It seems that everyone is growing their companies by leaps and bounds. It certainly seems like the right time to grow.
Is this the right time to grow a business? Perhaps. But owners should pursue growth only if it makes sense. They should consider a growth strategy only if they have the opportunity, if the company has the resources, if the operational systems are in place, and if they are ready to take on more responsibilities. Otherwise, the best bet is to stay put.
The popular press seems to glorify growth at almost any cost. They tell tales of companies that grew spectacularly and became famous. However, they never tell the stories of the many companies that pursued growth, failed to execute and crashed miserably. Growth is a double-edged sword. It can make a business prosper, but it can also be its downfall.
Most managers focus their expansion efforts during a growing economy. There is merit to this strategy, but owners and managers should remember that they can grow during a recession as well, in some cases substantially. I witnessed this phenomenon many times during the Great Recession—companies in the construction industry were growing when everyone else was closing their doors.
What should an owner do before growing? Before considering growth strategies, he or she should make sure the company is running well. A business’ financial and operational performance needs to be well tuned and run efficiently. Specifically, an owner should consider the following questions before pursuing growth.
Is the business profitable?
The only reason an owner should consider a growth strategy with an unprofitable business is if the company is new or in a turnaround, and has not yet reached the break-even point. If a business is established and unprofitable for any other reason, an owner must fix that first before considering growth. Obviously, there are some exceptions to this rule.
An owner should examine the business carefully and determine why it’s losing money. Are products priced incorrectly? Are customers not paying? Are costs too high? If the owner can’t fix the problem, he or she can consider hiring a turnaround specialist.
Does the business have a cash reserve?
Pursuing a growth strategy without a proper cash reserve is like jumping out of a perfectly working airplane without a parachute. It ends badly. Growth may increase revenues, but it also increases costs and the challenges a company must face. The company must be prepared to weather those problems with a solid cash reserve. To learn how to build a cash reserve, read “How to Build a Cash Reserve” on page 18 of the April 2016 edition of Glass Magazine.
Could the business weather a recession?
Determine if the current business can weather a recession. Then forecast if the business could weather a recession if it hit after growth has been added. Having a profitable business with a cash reserve takes a company a long way toward ensuring it can survive a recession. An owner should examine cost structure and reduce expenses where he or she can.
Does the company have financing to cover operations?
Determine if the growth strategy needs financing. If so, get financing before pursuing growth. A profitable business with a cash reserve also looks good on paper. Consequently, this is usually the best time to prove to a financial institution that your company is a low risk. Thus, this strategy makes it easier to get financing at the best possible terms.
A line of credit tends to be the best solution to help companies cope with the cash flow challenges that usually come with growth. Credit lines are flexible and complement a cash reserve nicely.