What to consider before expanding your business
Most closely held business owners want to grow their companies. Growth represents progress, and it can result in financial rewards and new opportunities for owners and employees.
However, growth results in a whole new set of challenges for businesses. In particular, expanding will have a significant impact on most companies. This makes it critical to plan your growth initiatives carefully so that growth doesn’t lead to cash flow and other financial problems that can jeopardize your company’s future.
How will you finance growth?
The first step in planning for business growth is to draft a strategic growth plan. This plan should detail not only the products, services and markets that will fuel your company’s growth, but also how growth will be financed. Growth financing can come from either owner’s equity that has been retained in the business or an outside source of funding.
Outside financing takes two different forms: debt and equity. Debt is simply a business loan, usually from a bank, that must be repaid over a set period of time. Several different types of bank loans can be used to support business growth, including term loans, commercial mortgages, construction loans, equipment leases and SBA loans.
Equity financing, meanwhile, differs greatly from debt. Here, you would sell a slice of ownership in your company to an outside investor (or investors) who would provide growth capital. Private equity firms and venture capitalists, including so-called angel investors, are the most common sources of equity financing.
There are pros and cons to both types of growth financing. A loan must be repaid with interest, and banks usually require borrowers to provide detailed financial information and pledge collateral to support the loan, possibly including the owner’s personal residence. On the other hand, equity doesn’t have to be repaid — investors expect to reap returns via their ownership stake in the business.
Put another way: Debt is more of a “pay me now” form of growth financing, while equity is more “pay me later.” You know what your cost of debt financing will be in terms of the interest rate and term of the loan. With equity, your investors will be compensated down the road if your growth initiatives are successful. Depending on how much equity you sell and how successful your company is in the future, equity could end up being much more expensive than debt in the long run.
What are your growth strategies?
Once you’ve decided how you will finance your growth initiative, you can start to plan out your company’s path to growth. Common business growth strategies include:
Creating and delivering new products and services. This is probably the most obvious growth strategy, but that doesn’t mean it’s easy. Conduct market research to determine not only which new products and services will appeal to your customers, but also which ones will be profitable.
Tapping into new markets and territories. The idea here is to market and sell your existing products and services to different customer niches or to customers in different geographic areas. Extensive market research is again one of the keys to success for this growth strategy.
Penetrating your existing markets. This strategy involves selling more of your existing products and services to your current customers. Start by performing a market segmentation analysis to determine which customers to target with marketing messages designed to increase specific product and service sales.
Developing new sales and delivery channels. The Internet is the best example of a new sales and delivery channel for products and services. Talk with your sales and marketing executives about ways you can use the Internet or another alternative channel to grow your sales and revenue.
A merger or acquisition (M&A) is another way to grow that’s very different from these organic growth strategies. This strategy can result in rapid growth literally overnight, as well as the realization of valuable synergies between the merged companies. Performing thorough due diligence on acquisition candidates is usually the key to a successful M&A.
Seek outside expertise
It’s smart to seek outside expertise as you work on your growth plan. Holbrook & Manter can offer objective advice and direction as you initiate and execute your strategic growth initiative. We can also perform a profitability analysis of your proposed expansion to help make sure that it will produce the financial results you expect. Contact us today for more information.