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How and Why to Expand a Business (or Not)

Before a new company is launched, the owner needs to know a few things. Things such as:

  • Who is going to buy the product or service?
  • Does the product or service offer better value or an improvement on similar products or services already available?
  • Where will the start-up money come from? How will it be spent most effectively?
  • What are the current and anticipated market conditions related to the product or service?

The answers to these and many other important questions will help determine how (or if) the new company can be a sustainable operation over a long period of time.

Now, say the answers to those questions all indicate that the new company has promise. Consumers love the product or service and sales are meeting (or exceeding) expectations. The company seems to be thriving.

Things are going great. Is it time to think about expansion?

Perhaps so. Yet, an even better time to think about expansion would have been back when the business owner was writing the company’s original business plan, a skill one can learn and improve on by earning a Master of Business Administration.

Part of being a business owner is looking ahead and planning for contingencies. If the owner is fortunate, and if he or she has set attainable goals that are designed to help the company mature steadily, one of those contingencies just might be expansion.

Here is the first rule of potential expansion for every new business owner: Be prepared to respond to good news as well as bad.

According to Inc. Magazine, not being prepared for sudden growth can ruin a company: “One (aspect of business expansion) is planned and carefully managed at the business owner’s initiative. The other … is sudden and involuntary expansion that simply happens for various reasons – among them economic expansion or simply because the business caught the market’s eye with a novel product or service. Careful management of such good fortune may be even more vital than planned growth.”

Always Be Ready to Grow

Just as a company needs a crisis management plan, a business owner should plan for growth built around a best-case scenario. That said, not all companies are created to grow – or they are not created to expand beyond a certain level.

What does that mean? It means that every situation is unique, and some business owners are not necessarily in it to create the next giant international conglomerate. Some owners simply want to make a good living doing something they love and are good at, and are satisfied by providing that product or service to a niche set of consumers.

On the other hand, an unanticipated surge in demand can occasionally create a crisis based on sudden growth.

The non-profit Kauffman Foundation and Inc. Magazine conducted a follow-up study of the Inc. 5,000 fastest growing small business list. Within five to eight years, about 67% of those companies had stopped growing or gotten smaller, gone out of business entirely or been sold at a loss or for minimal profit.

The conclusion: The two-thirds of companies that once had been on a fast track to big success had failed to take steps to reach full “enterprise maturity.” That is, they had not done what they needed to do to be self-sustaining entities.

In other words, they had not planned for all contingencies and were not ready to grow.

Slow, Steady Steps to Expansion

It is not necessary to formulate a detailed plan for long-term expansion. After all, things change from year to year, and not all change is predictable.

That said, a business plan should include a framework for how the company will respond to gradual growth and to sudden surges of success. That framework should be guided by the answers to the questions listed above – questions that reveal the viability and health of a company.

In fact, a business owner never should stop asking those questions. Market conditions evolve or shift quickly, and a company needs to be prepared to respond. The best way to do that is to maintain updated knowledge about the company’s revenue sources, customer base, supply chain, employees, marketing plan and everything else that can help determine a company’s health.

With that information at hand, an owner can make more informed decisions about whether to open a new office or take other action related to expansion, such as:

  • Introducing a new product
  • Introducing an existing product to new market
  • Licensing a product for others to make
  • Franchising the business
  • Merging with another organization
  • Purchasing another business
  • Entering foreign markets

If and when the decision is made to expand, it is vital that the stakeholders stay on top of any process changes or additional work required, understand all legalities and meet all regulatory requirements. This means:

  • Registering the business with the right local, state and federal agencies
  • Paying the appropriate taxes and fees
  • Maintaining proper cash flow management and billing
  • Paying close attention to operating cost increases and the shifting margin
  • Hiring people with the proper experience or training current employees to handle new tasks

Giving early thought to these and other issues related to planned and unexpected growth will prepare a business owner to best position the company for expansion. There is one more thing to consider, too.

Just because a company CAN expand, does it necessarily follow that it SHOULD expand?

Only a business owner can answer that question, but there are a number of reasons NOT to grow. Here are two potential reasons for that:

  • Maintaining the status quo as an exit strategy – It might be that the business owner is ready to close the business, and piloting a period of growth would mean expending more energy than he or she is ready to expend on a short-term project.
  • Meeting expanding demand is not cost-efficient – If a sudden surge in demand for a product or service occurs, the logistics necessary to deliver to consumers might not be profitable. In these cases, business owners might choose to focus the company on a smaller, niche segment of the consumer base.

Ask most business owners if growth is a good thing, and they will likely say yes, of course. Yet, expansion without a long-term plan – or a framework for managing unexpected, sudden growth – might be like flying too close to the sun.

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