An owner will get the growth itch at several points during a company’s life cycle. Perhaps an opportunity to win business from a prestigious client depends on whether the company can expand operations. Maybe a new product could capture sales from a completely different market untapped potential or purchasing new equipment could increase productivity, volume and, hopefully, sales. Opening another location might also build the brand.
“Common mistakes are investing in equipment too quickly, misjudging the industry, depending on a concentration of customers and, ultimately, not thinking through the reasons for growth and the resources necessary to get to the next level,” says Kim Snyder, AVP, business banking officer for Fifth Third Bank in Cincinnati. Snyder has advised business owners for 18 years, watching garage start-ups expand to become international businesses.
Smart Business asked Snyder to provide insight on how successful businesses grow.
At what stage in business do many owners decide to grow?
Businesses reach various turning points when they must make a decision to grow to the next level. Common milestones for growing companies are when revenue reaches $1 million, $5 million, $10 million, $15 million and $25 million. At each stage, an owner faces different growth challenges and is probably choosing to grow for a different reason. For example, a company that is about to teeter over the $1 million mark may decide to expand operations to accommodate a promising new client who will push the company to the next level. On the other hand, a company that is in the $25 million range may decide to open a second or third location or decide to begin franchising the business. Every industry and business is different, but ultimately, the reason owners decide to grow is to make more money. Either business has flatlined and the owner wants to change to defy competition, or the company needs a new product, or it must find a new niche to increase sales.
What are the signs that a business is prepared, financially and structurally, to go to the next level?
Usually, the business will have a diversified client base, so it doesn’t have all its eggs in one basket. The business has an excellent reputation in its market and people in the industry know the company. It has strong relationships with vendors, and its balance sheet is healthy. This means that the ratio of assets to liability is in line. A company should not have too much debt compared to the equity in the business if the owner is planning to grow. Most important, the owner should have conversations centered on growth with his or her CPA, attorney and banker. These three advisers should know each other and communicate regularly. The owner should bring together this team on, at least, a semiannual basis to discuss the state of the business. Business owners who are prepared to go to the next level have educated their key advisers about the risks associated with growth and collected their feedback during the process.
Who else should an owner include in initial conversations about growth?
First, most owners have conversations about growth with industry peers. They discuss it at trade shows or association meetings places where they network with like businesses, including the competition. They ask questions like ‘How did you do it?’ Just as important is including family in the decision to grow, and many owners forget to discuss the business at home before making decisions that will change family members’ lives. It takes time to grow a business, and the family has to be on board, too.
What should an owner tackle before considering growth?
First, a work chart must be in place so employees understand their roles in the company’s success. Employee buy-in is critical, so owners must include employees in their growth strategies. Involve managers or create a board and bounce ideas off key supervisors; share financials or explain the market so employees understand why the company must grow to the next level. While doing this, owners must sit down and consider any possible pitfalls. For example, if the business opens another location, will the second store sabotage sales at the first one? Will the owner need to hire another manager? How much capital must be invested to drive growth, and will the investment pay off? These are questions that a CPA can help answer. A banker will serve as a quarterback by bringing in advisers within the financial institution to help secure loans or link owners to other services.
What business characteristics do successful ‘on the grow’ companies share?
Many of these businesses take a careful, conservative approach to growth. They research before they make a move they know their numbers, and they rely on their key advisers. If their banker calls or e-mails to gather financials, they don’t lag or delay in reporting the information.
KIM SNYDER, AVP, is business banking officer for Fifth Third Bank in Cincinnati. Reach her at Kimberly.Snyder@53.com or (513) 686-1303.