BUSINESS EXPANSION

Photo by: abacus

All successful small business startups eventually face the issue of
handling business expansion or growth. Business expansion is a stage of a
company’s life that is fraught with both opportunities and perils.
On the one hand, business growth often carries with it a corresponding
increase in financial fortunes for owners and employees alike. In
addition, expansion is usually seen as a validation of the
entrepreneur’s initial business startup idea, and of his or her
subsequent efforts to bring that vision to fruition. But as Andrew J.
Sherman observed in

The Complete Guide to Running and Growing Your Business,

business expansion also presents the small business owner with myriad
issues that have to be addressed: “Growth causes a variety of
changes, all of which present different managerial, legal, and financial
challenges. Growth means that new employees will be hired who will be
looking to the top management of the company for leadership. Growth means
that the company’s management will become less and less
centralized, and this may raise the levels of internal politics,
protectionism, and dissension over what goals and projects the company
should pursue. Growth means that market share will expand, calling for new
strategies for dealing with larger competitors. Growth also means that
additional capital will be required, creating new responsibilities to
shareholders, investors, and institutional lenders. Thus, growth brings
with it a variety of changes in the company’s structure, needs, and
objectives.” Given these realities, Sherman stated that “the
need of the organization to grow must be tempered by the need to
understand that meaningful, long-term, profitable growth is a by-product
of effective management and planning.”

METHODS OF GROWTH

Small businesses can expand their operations by pursuing any number of
avenues. The most commonplace methods by which small companies increase
their business are incremental in character, i.e., increasing product
inventory or services rendered without making wholesale changes to
facilities or other operational components. But usually, after some period
of time, businesses that have the capacity and desire to grow will find
that other options should be studied. Common routes of small business
expansion include:

• Growth through acquisition of another existing business (almost always
  smaller in size)
• Offering franchise ownership to other entrepreneurs
• Licensing of intellectual property to third parties
• Establishment of business agreements with distributorships and/or
  dealerships
• Pursuing new marketing routes (such as catalogs)
• Joining industry cooperatives to achieve savings in certain common areas
  of operation, including advertising and purchasing
• public stock offerings
• Employee stock ownership plans

Of course, none of the above options should be pursued until the
business’s ownership has laid the necessary groundwork. “The
growth process begins with an honest assessment of strengths and
weaknesses,” wrote Erick Koshner in

Human Resource Planning.

“Given those skills, the organization then identifies the key
markets or types of future market opportunities the company is likely to
capture. This, of course, raises another set of issues about how to best
develop the structures and processes that will further enhance the
organization’s core capabilities. Once these structures and
processes are identified and the long range planning completed, the
business has a view of where it will be in three to five years and
agreement on key strategies for building future business.”

EXPANSION ISSUES

Whatever method a company chooses to utilize to expand—and whatever
guiding strategy it chooses to employ—its owners will likely face a
combination of potentially vexing issues as they try to grow their
business in a smooth and productive manner. “Expanding a company
doesn’t just mean grappling with the same problems on a larger
scale,” wrote Sharon Nelton in

Nation’s Business.

“It means understanding, adjusting to, and managing a whole new
set of challenges—in essence, a very different business.”

GROWING TOO FAST

This is a common malady that strikes ambitious and talented entrepreneurs
who have built a thriving business that meets a strong demand for a
specific set of goods and/or services. Success is wonderful, of course,
but rapid growth can sometimes overwhelm the ill-prepared business owner.
“Companies growing at hyper-speed sometimes pay a steep price for
their success,” confirmed

Ingram’s

contributor Bonar Menninger. “According to management experts,
controlling fast-track growth and the problems that come with it can be
one of the most daunting tasks an entrepreneur will face.” This
problem most often strikes on the operational end of a business. Demand
for a product will outpace production capacity, for example. In such
instances, the business often finds that its physical needs have outgrown
its present facilities but that its lease agreement or other unanticipated
factors hinder its ability to address the problem. “You may sign a
five-year lease for a building, and 18 months later you’re busting
at the seams,” one executive told Menninger. “We had to move
three times in five years. When we signed our latest lease, we signed a
three-year deal. It’s a little more expensive, but we can bail if
we have to.” In other cases, a business may undergo a period of
feverish expansion into previously untapped markets, only to find that
securing a meaningful share of that market brings them unacceptably low
profit margins. Effective research and long range planning can do a lot to
relieve the problems often associated with rapid business expansion.

RECORDKEEPING AND OTHER INFRASTRUCTURE NEEDS

It is essential for small businesses that are undergoing expansion to
establish or update systems for monitoring cash flow, tracking inventories
and deliveries, managing finances, tracking human resources information,
and myriad other aspects of the rapidly expanding business operation. As
one business owner told

Nation’s Business,

“if you double the size of the company, the number of bills you
have goes up by a factor of six.” Many software programs currently
available in the marketplace can help small businesses implement systems
designed to address these recordkeeping requirements. In addition, growing
enterprises often have to invest in more sophisticated communication
systems in order to provide adequate support to various business
operations.

EXPANSION CAPITAL

Small businesses experiencing growth often require additional financing.
Finding expansion capital can be a frustrating experience for the
ill-prepared entrepreneur, but for those who plan
ahead, it can be far less painful. Businesses should revise their
business plan on an annual basis and update marketing strategies
accordingly so that you are equipped to secure financing under the most
advantageous terms possible.

PERSONNEL ISSUES

Growing companies will almost always have to hire new personnel to meet
the demands associated with new production, new marketing campaigns, new
recordkeeping and administrative requirements, etc. Careful hiring
practices are always essential, but they are even more so when a business
is engaged in a sensitive period of expansion. As one consultant told

Ingram’s,

“too often, companies spend all their energy on marketing and
production plans and ignore developing similar roadmaps for their
personnel needs.”

Business expansion also brings with it increased opportunities for staff
members who were a part of the business in its early days. The
entrepreneur who recognizes these opportunities and delegates
responsibilities appropriately can go far toward satisfying the desires of
employees who want to grow in both personal and professional capacities.
But small business owners also need to recognize that business growth
often triggers the departure of workers who are either unable or unwilling
to adjust to the changing business environment. Indeed, some employees
prefer the more relaxed, family-type atmosphere that is prevalent at many
small business establishments to the more business-like environment that
often accompanies periods of growth. Entrepreneurs who pursue a course of
ambitious expansion may find that some of their most valuable and
well-liked employees decide to instead take a different path with their
lives. In addition, Nelton pointed out that “some employees may not
be able to grow with the company. You may have to let them go, despite
their intense loyalty and the fact that they have been with the company
since its inception. This will be painful.”

CUSTOMER SERVICE

Good customer service is often a significant factor in small business
success, but ironically it is also one of the first things that tends to
fall by the wayside when business growth takes on a hectic flavor.
“When the workload increases tremendously, there’s a feeling
of being overwhelmed,” one small business owner admitted to
Menninger. “And sometimes you have a hard time getting back to
clients in a timely fashion. So the very customer service that caused your
growth in the first place becomes difficult to sustain.” Under such
scenarios, businesses not only have greater difficulty retaining existing
clients, but also become less effective at securing new business. A key to
minimizing such developments is to maintain adequate staffing levels to
ensure that customers receive the attention and service they demand (and
deserve).

DISAGREEMENTS AMONG OWNERSHIP

On many occasions, ownership arrangements that functioned fairly
effectively during the early stages of a company’s life can become
increasingly problematic as business issues become more complex and
divergent philosophies emerge. For example, Sherman noted that in many
growing enterprises that were founded by two or more people, “one
or more of the cofounders are unable to keep pace with the level of
sophistication or business acumen that the company now requires. Such a
cofounder is no longer making a significant contribution to the business
and in essence has become ‘obsolete.’ It’s even
harder when the obsolete partner is a close friend or family member: In
this case, you need to ask: Will the obsolete cofounder’s ego allow
for a position of diminished responsibility? Can our overhead continue to
keep him or her on staff?” Another common scenario that unfolds
during times of business growth is that the owners realize that they have
profoundly different visions of the company’s future direction. One
founder may want to devote resources to exploring new marketing niches,
while the other may be convinced that consolidation of the
company’s presence in existing markets is the way to go. In such
instances, the departure of one or more partners may be necessary to
establish a unified direction for the growing company.

FAMILY ISSUES

Embarking on a strategy of aggressive business expansion typically
entails an extensive sacrifice of time—and often of money—on
the part of the owner (or owners). But as Sherman noted, “many
growing companies, especially those founded by younger entrepreneurs, are
established at a time when all of the cofounders are either unmarried or
in the early stages of a marriage. As the size of the company grows, so
does the size of the cofounders family. Cofounders with young children may
feel pressure to spend more time at home, but their absence will
significantly cut their ability to make a continuous, valuable
contribution to the company’s growth.” Entrepreneurs
pondering a strategy of business growth, then, need to decide whether they
are willing to make the sacrifices that such initiatives often require.

METAMORPHOSIS OF COMPANY CULTURE

As companies grow, entrepreneurs often find it increasingly difficult for
them to keep the business grounded on the bedrock values that were
instituted in its early days. Owners are ultimately the people that are
most responsible for communicating those values to employees. But as staff
size increases, markets grow, and deadlines proliferate, that
responsibility gradually falls by the wayside and the company culture
becomes one that is far different from the one that was in
place—and enjoyed—just a few short years ago. Entrepreneurs
need to make sure that they stay attentive to their obligations and role
in shaping company culture.

CHANGING ROLE OF OWNER

“In the early years, from the time you start a business until it
stabilizes, your role [as small business owner] is probably
handson,” said Nelton. “You have few employees;
you’re doing lots of things yourself. But when a company
experiences its first real surge of growth, it’s time for you to
change what you do. You need to become a CEO—that is, the leader,
the strategic thinker, and the planner—and to delegate day-to-day
operations to others.” Moreover, as businesses grow in size they
often encounter problems that increasingly require the experience and
knowledge of outside people. Entrepreneurs guiding growing businesses have
to be willing to solicit the expertise of accounting and legal experts
where necessary, and they have to recognize their shortcomings in other
areas that assume increased importance with business expansion.

CHOOSING NOT TO GROW

Finally, some small business owners choose not to expand their operations
even though they have ample opportunity to do so. “For many small
business people, the greatest satisfactions in owning a business, which
often include working closely with customers and employees, inevitably
diminish as the business grows and the owner’s role
changes,” indicated

Nation’s Business

contributor Michael Barrier. “Many entrepreneurs would rather
limit growth than give up those satisfactions.” Other successful
small business owners, meanwhile, simply prefer to avoid the headaches
that inevitably occur with increases in staff size, etc. And many small
business owners choose to maintain their operations at a certain level
because it enables them to devote time to family and other interests that
would otherwise be allocated to expansion efforts.

Entrepreneurs looking to limit the pace of their business’s growth
need to consider the ramifications of various expansion options. For
example, a small business owner may decide that he or she needs an
infusion of capital. But entrepreneurs who decide to secure that capital
by making a public stock offering are in essence relinquishing any claim
on pursuing a course of slow growth. After all, stockholders expect to see
growth in the value of their stock, and that growth is predicated on
upward trends in market share, sales revenue, and other factors. Robert
Tomasko, author of

Go for Growth,

indicated that business owners should make certain that they and their
staffs are poised to handle the pressure associated with pleasing
stockholders. He pointed out that while stock offerings are an excellent
way of underlining ambitious growth plans, they can put nightmarish
pressure on small business owners who place greater emphasis on a relaxed
business environment, improving existing products or services, travel,
and/or time with family.

Analysts rush to point out, however, that the entrepreneur who chooses to
pursue a philosophy of limited or slow growth is not necessarily adopting
a course of management in which he or she allows the business to slowly
atrophy. “Limiting growth doesn’t mean refusing to
change,” said Barrier. “In fact, the right changes can be
crucial for profitability. A store’s product mix may change
radically over the years even if the store itself remains the same
size.” Indeed, the vast majority of companies have introduced
significant technological innovations into their internal operations in
recent years, whether they are in the midst of tremendous growth or
operating at the same basic size from year to year.

Finally, the methodologies that small business owners can employ to limit
expansion vary from industry to industry. Management experts point out,
for instance, that small service businesses (carpentry outfits,
dressmakers, housepainters, swimming pool cleaning services, etc.) can
often restrict growth by simply turning down new business, provided that
they have a sufficiently reliable stable of clients already in place.
Other small businesses can limit growth by raising the prices on their
goods and services. This method of reining in growth needs to be studied
carefully before implementation, because the firm does not want to lose
too much business. But analysts contend that for many niche industries,
this option not only limits growth but increases profits on the
company’s existing workload.

Experts warn, however, that strategies of limited expansion are not
practical in many of today’s highly competitive industry sectors.
As one executive in the high-technology industry pointed out to

Nation’s Business,

fast-growing companies in high-tech typically obliterate companies that
do not grow as quickly: “They’ll get big, their
manufacturing costs will drop, they’ll have three times as many
R&D [research and development] people fighting against you.”
Other businesses that operate in industries in which a dominant company is
eating up big chunks of market share likewise can not afford to pursue
policies of limited growth. Quite the opposite, in fact; such small
businesses often have to aggressively investigate possible new areas of
expansion in order to survive.