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 [email protected] or
(513) 686-1303.