This article are provided for information purposes only, and are not intended as legal advice.


Businesses – should you grow your business or always keep it the same size?

July 30th, 2009

You have been in business for many years and now are making a comfortable living.  Should you grow your business or keep it the way that it is?  Growing your business has risks and it also generates additional costs.  If your business grows by 20% and you are a small firm, you and your staff may be working harder and longer hours.  You may not generate enough additional profits to justify hiring another staff member but you also are unable to work additional hours.  As a result, you have to take on additional expenses which could include labour, rent, interest expense because you now need to carry more  inventory and require a bank loan.  In order to grow, you may end up going backwards and decreasing your profits before you increase them when the sales materialize from the additional effort.

 

What happens if your sales do not grow?  Unfortunately, costs are always increasing whether it be labour, materials, rent, utilities.  If you do not increase your sales, your profits will decrease over time.  If your profit margins are not high enough, you may end up with losses instead of being a profitable business.  As a result, all businesses need to grow the question is how big do you have to get? 

 

Do you expand the business and own 100% of the business or do you look for acquisitions or merger candidates to grow the business to the next level.  Where is your business in the life cycle – it is a young start up company, on a growth curve, a mature business or declining in sales?  An important factor is how old are you and how much more work and effort do you want to put into the business.  Are there heirs who will come into the business?  How many years do you think it will take to get to that level that you are striving for?   Will you be able to expand the business by internal growth or do you have to buy a business and acquire a competitor?

 

Other things that you need to consider, is it possible to expand the business even if you invest additional money into it?  If you are a retail store, you are limited predominantly to the customers in your area unless you can turn your business into a destination location rather than just the local store.  If you are a destination, people will come from outside the noraml sales area to your location specifically to go to your location.   If business is purely by contracts, then expanding the business is contingent on successfully bidding on work but in those cases, you are in a difficult position, do you bid on work without staff or do you hire the staff who can do the work but will have nothing to do unless you win the contract?  In a poor ec0nomy, are you able to hire sales people from your competitors?  Are these sales people subject to a non compete clause or will you have to incur legal costs if the competitor sues you?

 

What is your time line for growing the business?  Are you planning to retire in a year or two?  If you are going to sell your business, why incur the extra costs required to expand the business?  If you are going to sell the business, the additional costs may affect the selling price of the business.  There are many different factors that you need to consider in your planning.  Keep in mind, there are no right and wrong decisions, what works best for you, that is the decision which you have to make.


Filed under: Business strategies — Gary Landa @ 12:19 pm


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