In the context of SMEs, growth can be a contentious topic. Many established businesses are not growing, which may or may not be a choice of the owner.
There are many good resources to read on growth, more detailed than the insights listed here. Though in the context of growth, engrained in my head is the words of a successful business mentor of mine. He would always remind me to “Focus on the Revenue”.
His message was that when businesses grow, they tend to invest a lot of time in activity that is not highly valuable. Then, they fall into a cycle where Revenue falls, and a cycle of cost reduction follows.
There are many potential benefits of growing, which can also include merger or or acquisition activity too. Some potential benefits include:
Some diversity can reduce business risk;
Opportunity for people to develop, provide careers and retain them;
A recovery of your fixed overhead or excess capacity;
Broaden your own experience and skills; and
Utilise the capacity in your business.
The options for growth can be divided into four categories:
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1. New Product, Existing Customer Provide some new services that you have decided to start offering to your existing customer base. |
2. New Product, New Customer Provide some new services that you have decided to start offering to a new customer base. |
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3. Existing Product, Existing Customer Sell more of the existing services that you already have/do to your existing customer base. |
4. Existing Product, New Customer Sell more of the existing services that you already have/do to a new customer base. |
These options may seem obvious; however, it is a good template when looking at your options should you choose to grow.
Can I Pivot into Other Services?
A common theme for SMEs is to extend their service offering to other services. This is an example of New Products to New or Existing Customers.
Whilst this makes sense to support new and existing customers - it is important to build the proper support mechanisms to ensure that these services are delivered appropriately.
Most commonly, however, the business owners do not have the will or the skill to deliver these services on a professional basis.
If you are to do this, invest some time into designing what the service will look like, understanding who you will provide them to and determining the skills your business must acquire before doing this properly. Then, seek out the support, tools and resources that you need to deliver on a sustainable basis.
Is it Worth Buying a Business?
The purchase of a business can help fulfil dreams, or might conversely fall well short of your expectations. This is an example of providing your Existing Product to New Customers.
We have seen success and failure in equal measure. Successful examples typically involve the following traits:
They engage pro-actively with the vendor to ensure the most effective transition of the customers;
They respect the heritage branding, and acknowledge that most customers don't care about the purchaser's business, they care about their own needs;
They build strong CRM capability (including importing of key customer demographics);
They do their due diligence and understand the customer base; and
They customise their messages to meet the needs of the customer base.
What Should your Expectations be as the Purchaser?
Expect a lower retention of purchased clients in comparison with ones originated by your existing businesses.
The vendor may say that customers will never leave, though many will be connected to them.
It can be an opportune time to change your positioning or introduce new products as the customer base has no previous experience with the business.
The decision to purchase is obviously tied to the financial implications which will address when looking at valuations. Advice should be sought if you do not have previous experience.
The volume of merger and activity in SMEs is not as material compared with other professional service industries. We touched on the risk averse nature of SME owners as one contribution to this fact.
When seeking funding support for acquisition, banks cannot draw on any volume of precedent performance. As a result, getting bank support for funding can be a little challenging.
Building Succession / Exit
"Your business is always for sale". That should be the mindset of the owner because at some point you will have an involuntary or voluntary exit from your business.
It is rare that Business Owners have a clear and documented exit strategy. That may be understandable in some instances, but it is not ideal. There is no exact science on this point, and the optimal time for each owner will vary based on a number of factors.
One optimal time may be before you hit the “Single Owner Cap”, especially if you are unlikely to grow the business.
It is important that as a business owner, you seek advice to work through your options for the end. This plan can be fluid, but it should be updated regularly.
Again, this is where good advice is so important. Succession planning should align with other related objectives such as:
Retirement Goals;
Asset Protection;
Estate Planning; and
Taxation Planning
For many SMEs, their business is their biggest asset outside of property interests.
More Information?
E - enquiry@mcpgroup.com.au
W - mcpfinancial.com.au