Last week on LinkedIn, I followed an interesting discussion about small business. The discussion was based on an article that appeared on the National Journal website under the title “Most Small Businesses Don’t Want to Grow”. The just of the article was that most small businesses, especially those with fewer than 20 employees, are not interested in growing their business.
It seemed that most of the participants in the LinkedIn discussion concurred that small companies are not interested in growth. I disagree. Having worked with small companies from less than $500 thousand in revenue up to $50 million in revenue, I can truly say that I have never encountered one that wasn’t interested in growth. They might, however, view their growth goals much differently than would a large business.
Large companies like to see that year-in-year-out march of steadily increasing revenues and profits, with ready explanations for the occasional hiccup. Assuming that the growth hasn’t come as a result of too much dilution of the share base, it should result in a steady increase in the stock price and the compensation of the executives. Small businesses, on the other hand, are more focused on their ability to put cash in the bank. Their notion of growth is the steady improvement of financial circumstances and reduction of business and personal risk.
Growth is critical for small business. But growth isn’t easy. Capital is extremely hard to come by and getting a new loan from a bank is very difficult right now. Virtually all loans to small business are based on the personal guaranty of the principal shareholders; so as a result, growth may actually increase their personal risk while reducing the business risk. Add to that the challenge of going to market against large powerful competitors with vast marketing budgets. No wonder many small business people are intimidated by the idea of growth. But if the small business doesn’t grow, its profits will slowly be eaten away by inflation, diluted among family members or start to dwindle away from lack of innovation.
So what should the small business person do?
For the small business, growth is difficult, intimidating, risky and necessary. There is no simple formula for getting it and no guarantees that it will come. On the other hand, not growing your small enterprise may be more risky. Here are some ideas that may help small companies start their growth engine:
1. Understand your niche – Analyze your customer base to understand which customers buy from you and why. Then tailor your marketing to that niche.
2. Identify financing sources – Do an inventory of the potential financing sources that are available to you and their relative cost. Remember that growth, even if it’s just additional sales of existing products or services, is likely to require additional working capital.
3. Evaluate industry trends – See what’s going on in your industry. You probably don’t want to be on the “bleeding edge”, but you don’t want to get too far behind, either.
4. Make “financial” decisions – Don’t make important business decisions based on tax factors. If an action makes good financial sense but may cost a little more in taxes, don’t let that stop you.
5. Consider business combinations – Sometimes two or more small companies coming together can make a much stronger single business. This is something that we will discuss in greater detail in a later post.
It’s not really a question of whether small businesses want to grow or not. Growth is essential for small businesses in order to maintain an acceptable level of business and personal risk. But in today’s business environment, growth is more difficult and intimidating than ever. Still, businesses that have succeeded in the past should be able to do so again.