How do entrepreneurs know whether their expansion plans are too rapid, or not fast enough? What steps can be taken to mitigate the risks of over-expansion?

A key consideration for businesses is how to plan for and manage growth. Although it may be tempting to grow at every opportunity, knowing when to say ‘no’ and strategically limiting growth can determine whether or not your business succeeds or fails. This article considers the various opportunities and risks of expanding an existing business and why effective planning goes a long way in combating those risks.

How can I grow my business?

There are many ways to grow business. Some examples include acquisitions of smaller organisations or offering a new service or innovative product. Many start-ups will also seek external investment (either raising finance or private equity investment). Listed companies can also promote growth through offering shares to the public.

Growing a business: where to start?

If you are looking to grow your business, there are various ways to get started:

1. Research your market – know exactly what it is you do, and what your competitors are doing. Do you need any licenses or regulatory consents? Don’t be afraid to reach out to existing customers.

2. Financing your business – Have you got the resources to achieve your goals? Are you able to meet the needs of your investors and keep the stakeholders happy?

3. Infrastructure review – can your existing setup accommodate growth or is new property being acquired?

4. Diversify – can you expand your service or product offerings to increase market share and dilute risk?

5. Stay competitive – is your business on top of the latest trends and technologies? Is there an opportunity to collaborate with a similar business (i.e. merger/acquisition?)

Expanding quickly: risk of over-expansion

Imagine a budding entrepreneur decides to bring a breakthrough product to market and this product is quick to catch the eyes of investors. There is an attraction here (for entrepreneur and investor alike) in being able to grow quickly and stay ahead of the competition. Although this may work, serious problems may arise if the expansion is based solely on current trends. If there is no contingency plan in place, failure to address these common pitfalls can have catastrophic consequences:

Market Barriers

An obvious way to expand is by spreading your geographical reach. Has any thought been paid to potential barriers to market entry? Entering into an oversaturated market can pose serious risks to growing businesses where there is aggressive competition and established brands. A growing business needs to consider if there is any financial support available for their target market or if any local brands are provided additional support that could otherwise harm sales.

Unmitigated/Unplanned Exponential Growth

Businesses that grow too quickly at the earliest opportunity may struggle with their existing infrastructure as the business undergoes changes. If there is excessive demand for an innovative product on the market, can the existing supply chain cope with the increased pressures on resources (manufacturing, property, personnel etc.)? This strain on resources could drive rash investment decisions based on the short term strain (e.g. distributors, new commercial premises, third party contracts). Failure to properly plan for this growth could destroy a business as it becomes tied into contracts that it cannot uphold if the demand suddenly drops.

Control/Ownership Issues in the business

Any business owner looking to raise capital needs to ask themselves this: how much control of the business am I willing to give up? Any investors will naturally expect to see a return on their investment and will expect there to be a clear strategy for growth.

As a business expands, the dynamics of the business will change as ownership of the business becomes decentralised. In an acquisition, how can you tell if a business is the “right fit”? A clear vision for the future of the business is essential - otherwise there can be friction amongst stakeholders and the core values of the business could be lost.

Expanding slowly: opportunity risk

The logical approach to tackling the risk of overexpansion is either to limit expansion or to decide not to expand at all. Is this the best approach however?

A failure to take opportunities due to reticence to change can also be harmful to businesses. Even if business is stable, what happens if any key clients or customers cease trading with the business or a key employee is no longer able to work? Planning for growth and diversification is a clear means of protecting smaller businesses against these eventualities.

Limiting growth in smaller service industries may be appropriate where an income stream is robust and virtually guaranteed (e.g. cleaning services) and resources may be better spent on refining those services. Contrastingly, in the technology sector, limiting growth at the wrong time can grind business to a halt while other competitors capitalise on their own growth and dominate the market.

A successful entrepreneur needs to know when to take risks. Recognition of the fact that there is an opportunity for growth should not be readily dismissed in favour of a ‘safer option’. Deciding to limit growth may be an appropriate course of action, but this must again be carefully planned out as it could risk turning down good business unnecessarily.

To Expand/Not to Expand: What is the optimum size for my business?

Good business planning should be frequent and thorough to ensure that your business will be working at its optimum at any given time. An organisation’s “optimum size” will vary depending on any fluctuations in the market. A well drafted business plan and clear review process should be able to efficiently respond to market challenges. Any adjustments should therefore be a deliberate and calculated part of business growth.

A business which plans effectively for its future will steer it, regardless of its rate of growth, on the path to success.

Alex Mudie is a solicitor at Wright, Johnston & Mackenzie LLP.