Updated 03 December 2020
Some small businesses stay that way, ticking over just enough to fund the owner’s lifestyle. But if you have bigger ambitions for your business, you’ll need to think about your growth strategy.
Growing your business can involve reaching new customers, sourcing new revenue streams or finding a new market for your product, but generally it will always involve increasing your turnover and (preferably) your profits too.
Business growth can be achieved in any of five different ways (often by several at a time). The different routes are:
The best way(s) for you to focus on will depend on the nature of your business – indeed, circumstances may steer you towards some routes rather than others. This is why it's a good idea to have a strong business plan, as this may suggest the best route(s) for growth. Your business might be in a position to choose between different options, so here’s a closer look at each one.
Organic growth is growth that happens as a result of your current activities, without you making radical changes to the business. It may come naturally as your reputation builds, or you may help it along by marketing activities, product development, recruitment drives or other forms of investment in your business. Your accountant can help you to spot opportunities for organic growth.
Sometimes organic growth may happen without any help, and may even progress faster than you wish (for instance, if you find yourself having to refuse big contracts due to capacity shortages). Again, your accountant can help you manage the pace of growth. At other times you will need to push hard for it, often by spending more money on it. Find out how to raise additional funding for growth.
Taiwanese tech company HTC was founded in 1990, but is yet to grow to the scale of some of its contemporaries. In the words of its CEO, it has ‘always focused on organic growth and never opted for the inorganic route’, only recently making its first acquisition. Instead it has worked hard at building long-term relationships and a strong client base to create loyalty, while prioritising quality over mass production. The result has been growth that is admittedly slow, but steady.
HTC shows that patience and diligence can sometimes achieve the same results as a more aggressive approach.
Sainsbury’s, the main rival to Tesco, expanded more cautiously than its larger competitor, shunning acquisitions for most of its early history. Instead it focused on a growth strategy based on innovation, pioneering the concept of the ‘self-service supermarket’ in the 1950s (based on inspiration from the USA) and developing own-brand goods to match the quality of famous brands. Not until 2004 did the company begin a serious acquisitions strategy.
Sainsbury’s demonstrates the value of bringing new ideas to market, rather than simply trying to dominate that market.
Apple is the odd one out among the tech supergiants, averaging just one acquisition per year (Microsoft and Google acquire at a rate of 10 or more per year). Instead Apple derives much of its growth power though in-house innovation, capitalising on home-grown talent to save on R&D costs at the same time. Apple’s greatest asset – born from the time in the 1990s when the company nearly collapsed – is its ability to focus on its core revenue streams and achieve greater capital efficiencies.
Apple is a shining example of a company ‘sweating its assets’ and making the most of what it already has, instead of looking elsewhere.
Diversifying your business is a form of organic growth, though one that may demand significant investment and business development. But it can be an excellent growth strategy, as it may lead to multiple revenue streams that complement each other. This makes your business more robust and better able to withstand shocks or seasonal shortfalls.
If you’re keen to diversify, start by thinking about your core product or proposition and brainstorm the other ways that people could use or consume it (a classic example is the way Apple went from computers to music players, to phones, to tablets). Alternatively, consider your available resources and generate ideas of other ways to use what you’ve already got (an independent farmer might use fallow fields to open a quad bike centre, for example).
You can grow your business by going into partnership with another business. This is a formal legal agreement, though the relationship itself could take a variety of forms. Maybe it’s a mutually beneficial relationship that results in growth for both parties, or maybe you pay the partner for access to a new market. Or you might offer non-monetary value to your partner in exchange for details of new potential customers – to name just a few examples.
Entering into a corporate partnership shouldn’t be done lightly. Most of all it hinges on two questions: what do you need, and what do they need? You need a thorough grasp of the pain points and motivations of both your business and the potential partner, to judge whether you are likely to work well together (and not end up being exploited). And remember, since a partnership is a legally binding agreement, you’ll need legal advice before proceeding.
Franchising can expand your business very quickly. It involves you granting permission for another business to operate under your brand. So, if you have a very successful local business and want to expand to new areas, franchising can help you target a larger market without the expense and time required to open a lot of new branches yourself.
This type of growth works best when used to replicate a successful and proven business model, where the brand and reputation is one of the main strengths. Whatever your business provides needs to be transferrable, i.e. you must be able to teach other people to do what you do, and as well as you do it (or close enough). If you let quality slip across the franchise, it may ruin not just the growth opportunity but also the original business’s brand.
Your solicitor can tell you more about the legal implications of a franchise agreement, and ensure you have the right legal protection in place.
If gradual growth isn’t enough and you’d prefer leaps and bounds, then you might look at acquiring another business or merging with one of similar size to create a much bigger enterprise. The rewards of mergers & acquisitions (M&A) can be great, but so are the risks. An acquisition (i.e. takeover) can consume a huge amount of your time, but of course you’ll need to keep your own business running smoothly meanwhile.
You’ll have to find a suitable target for acquisition, make the necessary approaches to see if they are willing to sell, negotiate a price, perform due diligence (essentially a kind of full structural survey of the business, to ensure there are no lurking surprises) and create a strategy for merging your two businesses successfully. Most crucially, you will also need to find the money to buy the other business (probably from bank borrowing and/or private equity) which will increase your own exposure to risk.
All in all it’s a huge undertaking, so you should find a specialist accountant who specialises in corporate M&A. You’ll also need plenty of legal advice throughout the process.
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