Header
Brought to you by Tom Long
Solid Oak Consulting, LLC		 )
Should I Shrink or Grow My Company? Vol. 4; Issue 2
In This Issue
  • Shrink Strategy
  • Growth Strategy
  • Coming In The Next Issue

    • Most businesses today feel like they’re stuck – shrinking revenue, compressed margins or simply an inability to increase sales. These are all signs of mature industries. Owners are faced with some critical decisions, especially if they plan to exit the business in the next few years.

    Over 40% of all small to mid-size businesses are owned by “baby-boomers” and many of these individuals are, or will be, considering retirement in the next two to three years. Now is the time to think about an Exit Strategy. Maintaining the status-quo isn’t a strategy. Therefore, you have two choices – shrink the business, try to improve profitability on static or lower sales volume or grow the business…easier said than done. But it is possible. Let’s look at both options.


    		Shrink Strategy

    The most common approach to improving earnings is shrinking the business or cutting back on expenses. Shrinking may also involve the elimination of unprofitable product-service segments, allowing you to concentrate on those areas that represent the highest profit potential.

    Cutting expenses may improve earnings so long as revenue remains constant or you shed unprofitable sales segments. In either case, the business may not present itself favorably to the market. While this strategy may free up cash that translates to bottom line profits, buyers may view this situation as a company in retreat and offer prices far below asking price.

    Some shrinking strategies lead to growth. For example, a company that is successful at reducing its variable costs (costs that only occur when a sale is made – materials, production, delivery, etc.) may find itself in a position of becoming a low cost producer. This means that you are able to reduce price without sacrificing margin. Being the low cost producer means that you can still make money at a price where the competitors begin losing money. With proper marketing, this company could be positioned to grow at the expense of their competitors. Buyers would view this situation very favorably and may pay a premium price due to the likelihood of future growth.

    		Growth Strategy

    Growing a mature business isn’t easy, but there are proven strategies that can be successfully employed that may ultimately increase the value of your company.

    Growth strategies can be internal or external. The process begins with a commitment from the top and the selection and execution of the appropriate strategy. Samples of internal growth strategies for mature industries include:

    • Product – Service Line Extension
    • Value-Based Pricing Strategies
    • Marketing Innovation
    • Experiential Innovation
    External growth strategies might include:
    • Merger – Acquisition (line extension strategy)
    • Joint Venture
    • Strategic Partnerships
    All new strategies take time and commitment, but many do not require a great deal of expense. To improve the sale-able value of the company, you will need to have the strategy gain traction such that a growing financial trend can be seen by a buyer. This timeframe might be as long as three years and as little as six to eight months.

    Buyers, as well as lenders, will require that the strategic turnaround is real. Therefore, buyers and lenders will insist that the new strategy can show several months of increasing trends. Lenders have specific loan underwriting guidelines when it comes to business sales. These may require the new growth strategy be in place long enough to demonstrate two successive years of “cash flow available to repay the buyer’s proposed acquisition loan,” This is typically 70% to 80% of the price agreed upon. This requirement alone could force you to hold on to the business for another year beyond your plan. The upside, however; is the premium price you’ll realize when you sell!

    Too many business owners work their entire lives at a business and wind up with very little in return. Many will just shut the doors. Don’t be one of these people. If you can invest at least 18 months, BizMACH can show you how to get a handsome return for your life’s work.

    		Coming In The Next Issue

    Don't miss the next issue of Exit for Success.

    How Interest Rates Affect the Value of Your Business

    Use the link below to read previously published issues.


    BizMACH is an association of highly skilled consultants, evaluation experts and merger and acquisition specialists. We take ordinary companies and create extraordinary value. Best of all, we only work with lower mid-market companies.

    Competitive advantage is the key to revitalizing your company's growth and profitability. Call us if you'd like a free consultation and to learn how BizMACH can grow your company and increase its value.

    When you work with BizMACH, you're using the BEST®.
    Business Evaluation and Salability Tool


    Tom Long
    Solid Oak Consulting, LLC
    522 South Elmwood Ave
    Oak Park, IL 60304
    708-524-0886
    telong@solidoakconsulting.com


    Executive Associate
    Accredited by the Institute for Independent Business

    Quick Links...

    phone: 800-989-9002