BUSINESS EXPANSION

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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.

BUSINESS EXPANSION

METHODS OF GROWTH

EXPANSION ISSUES

CHOOSING NOT TO GROW

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