When small businesses are faced with an opportunity to grow, the prospect can be scary. Here is want to consider first before you Scale your business.
My friend Eric* has a problem that many business owners face. He has been running his small business profitably for over five years. He hasn’t achieved much growth on an annualized basis but the company generates sufficient cash flow to give him a comfortable standard of living, keep his eight employees happy and fulfill his customers’ requests. He has what is commonly known as a “lifestyle business.” But Eric has suddenly been presented with an opportunity that would more than triple the size of his company (on a revenue basis) if he accepts the project.
Many business owners—especially in this economy—dream of having problems like this. But for Eric, he isn’t convinced that he should accept the project. He’s asking himself if he should scale his business.
Have you asked yourself this question?
When we talk about “scaling a business” we are talking about increasing revenues by several orders of magnitude. Businesses that go through this process of rapid expansion are known as “growth companies” and typically are considered the rock stars of the entrepreneurial world. Why would the owner of a successful lifestyle business consider transitioning into a high growth business?
The reasons include:
Survival
It’s easy to maintain a lifestyle business if your industry is composed of similar companies. But as soon as a growth company enters your market, it’s time to adapt. Otherwise the new competitor will aggressively capture market share. This will allow for economies of scale that could underprice you. It may also create doubt among your existing customers. They may start to think that perhaps there is something wrong with your company that doesn’t allow you to grow. It could lead to the forced sale or closure of your business.
Boredom
Many lifestyle business owners grow tired of the monotony of operating a business that doesn’t grow. The lack of new challenges and opportunities could lead to sloppy execution as focusing on the day to day tasks becomes more difficult.
Money
While lifestyle businesses can generate steady cash flow that provides for a comfortable living, they won’t make the owner a fortune. Whether it’s through acquisition or a public offering, exit strategies that create tens of millions or hundreds of millions of dollars for owners are growth companies. I can’t envision a corner deli selling for $80 million.
Go to the full article: Should You Scale Your Business?
