We are presently in one of the worst business environments in decades.
Our world is on the brink of a full blown European war. Domestically Canada is facing rampant inflation, one of the world’s biggest real estate bubbles, rising interest rates, a housing shortage, and declining productivity.
This situation is an ominous threat to small business, it will also provide opportunities for some.
In this article I would like to share some of the insights that I have acquired concerning Small Business and Growth. These have been gathered over many years that I have spent as advisor, lender, and senior officer in dozens of assignments.
Most importantly I would like to convey the most common perils facing a business that is seeking to grow and how they can be avoided.
Many attempts at increasing growth provide limited success or fail. This is particularly true concerning organic growth or growth from within, or non-organic growth which is the acquisition of another entity. Mergers or acquisitions often become problematic.
There are many reasons to grow such as; increasing sales, capacity or product line, increasing new clients or markets, diversification. A reason that I often see is that expansion is viewed as salvation from distress. This view almost always results in failure.
This is because the actual reason for expansion is not really understood. Also most distressed companies have some significant challenges. These include; inadequate quality of data, a shortage of Working Capital, declining sales and margins, and diminished management talent. This automatically prevents the formation of a viable business plan for success.
It is crucial that any business seeking to expand clearly understands the strategic purpose of expansion. It must also understand just how organic or non -organic growth will be accommodated by the existing infrastructure.
Favorable conditions for Growth exist if;
- There is an increasing demand of its product or services
- There is a track record of profits
- The existing business has sufficient working capital.
- The company does have a culture of Performance Management( see Performance Management and Small Business- by Tommy Onich published in SME July 2023)
- There are available resources to launch growth of all sorts: personnel, financial, management MIS accounting. While these are all important sufficient capital to execute the growth strategy is vital.
- A clear business plan has been prepared which is dedicated to growth.
These criteria apply to both types of growth and their presence significantly increases the probability of success.
A quick glance at some real life examples is illustrative.
The first case involved an amalgamated group of Physician practices. This group was the result of an aggressive growth strategy by a single practice. This involved the Acquisition of over 20 individual Physician practices over a relatively short period of time. The notion was to create a critical mass to multiply profitability by a large factor.
The existing practice was profitable however the amalgamated group was structured such that losses were guaranteed. This is because nearly each acquisition was very poorly executed. The purchase price by the founding practice was not always at market value. And the Physicians joining the group were paid a fixed salary which often exceeded gross practice revenue.
Predictably the group began to develop serious operating losses and reached the brink of insolvency. Unfortunately the agreement with individual Physicians could not really be redone. They had no incentive to reduce their earnings as their skills were completely mobile. The company ultimately declared Bankruptcy.
The second case involves a company that was involved in railroad repair and construction. It was founded by an individual over twenty years ago and had grown profitably at over 50M in sales.
It did lack in the area of Performance Management. This was of particular concern in both cost control and the bidding process. As a result in began it experiencing losses.
At the same time the owner began to aggressively make outside investments. This included making a large deposit on a real estate deal that was non refundable resulting in a loss. The owner also acquired to other companies in unrelated businesses, also generating losses. Ultimately the bank demanded loans and the company filed for Bankruptcy
The current business environment creates more challenges than ever for small business. This environment will also create opportunities for growth.
Rapid growth always presents a challenge, grasping at such opportunities without for-thought and planning will often result in great difficulty or even disaster.
Preparation should consider conditions favorable for success concluding with a business plan dedicated to the proper execution of a growth strategy.
