The potential benefits of growth for small business owner are numerous. They include increased sales and profits, a better valuation, benefits of scale, a greater market share, and increased strength vis a vis the competition.
The potential downside of a growth strategy gone wrong is disaster. This result is a common outcome.
The purpose of this article is to bring the reader some useful information concerning business growth and its perils. This information is derived from my many years of financing and M&A experience with Small businesses of many types.
The first step is to determine if a growth strategy should be executed. This begins with a true understanding of the existing business. Very often, I see a business facing difficulties that desire to recover by buying something else. One sick entity combined with another one just creates a bigger entity which is still sick.
Any aggressive growth strategy requires monumental effort, and the existing company must be operating on all cylinders. It may need its infrastructure to support the effort and cannot be a drag upon strategic execution.
The company seeking growth must have given much clear thought to the essential and fundamental reasons for its desire to grow.
If these reasons indicate an effort should be made to launch a growth strategy, there are many issues to be included in the preparation. This will likely start with the choice of internal growth or growth from the acquisition. It is important to understand how the target will relate to the existing business if it is an acquisition. The target may be a going concern or a company in distress, or even bankruptcy. The target may be a new start-up or even a restart. The restart is of special concern because it may have significant and unknown legacy issues. See the case below on Yacht Company.
This company was one of my first assignments, it was a well-known yacht company in Ontario. It had been the target of a much larger shipping company a few years ago. At that time it was a restart. Its current condition was abysmal, in fact it represented a restart of a restart.
The company had lost about 7M in the last few years, losses continued and the company constantly needed outside injection of funds from off shore.Sales had dropped and the company no longer had effective product distribution. On some sales gross margin was actually negative, this reflected on a poor production team. The company had a fire for which it was underinsured. This further impaired working capital and adversely impacted reputation. Legacy issues such as the fire, poor costing,and a lack of competent production staff made an actual turnaround very difficult to execute. The Board accepted my recommendation to liquidate.
Although I was able to make some recovery with the sale of assets, total losses were somewhere between 8 and 10 million dollars.
The Acquirer had done nearly everything wrong that was possible. A brief list of salient points includes.
- The Acquirer was a large shipping company seeking to expand by purchasing a small yacht company that was a restart of a restart. One of the most difficult targets.
- There was no fit or synergy in terms of growth.
- There was also no internal management available in the Acquirer capable of such a turnaround. They were also 10,000 miles away.
- The turnaround manager hired by the Acquirer was woefully inadequate. He had no direct turnaround experience or Yacht experience.
- The manufacturing staff of the target was poorly led, and cost overruns were common without explanation.
- The yachts were probably underpriced in the market.
This single and simple example of a failed Growth strategy is not uncommon. The following points will be of use to the small business seeking growth;
1. Understand your existing business. This understanding will be based upon data that is; transparent, accurate, relevant and reliable.
2. Fix current problems before launching an effort to expand Growth
3. Understand the motive for Growth.
4. The target must provide a fit or a synthesis.
5. Have a competent management team before any Growth Strategy is launched.
Tom is a specialist in interim and crisis management with 20 years of senior management experience in financial, operational and statutory restructuring. He has served as Chief Restructuring Officer, Chief Executive Officer, and Chief Financial Officer in a wide range of business sectors, including health care, structural steel, garment manufacturing, yacht building, dies cast, railroad repair and food processing. He is recognized for his achievements in the following areas: statutory restructuring, cash flow management, creditor negotiations, management assessment, performance management, corporate strategy or business planning, organizational assessment, and corporate due diligence. Tom has successfully restructured organizations through informal arrangements with creditors and by statute. He is one of the few turnaround professionals experienced with the insolvency regimes of both Canada and the United States. Prior to his work in corporate renewal, he was engaged in corporate lending with a major Canadian Bank winning several awards for innovative solutions tailored to client’s needs.