The desire to grow and expand is part of human nature, as is the desire to grow and expand a business. While growth can bring unlimited success, if it is not done correctly, it could spell disaster for businesses, especially those in the inherently risky construction industry.
Successful expansion requires honest self-evaluation and a basic understanding of potential pitfalls.
The Decision to Expand
Before leaping into action, owners need to understand why they want to expand and what is the result that they hope to achieve. It is important to fully understand the reasoning behind the desire for growth. Is it based on existing opportunity, the desire for additional revenue or ego? It is important for owners to ask themselves why they believe expansion is a good decision. This requires an honest and open self-evaluation. If the why question cannot be answered with specific reasoning, then perhaps there is no reason to expand.
What is the Goal of Expansion?
Similarly, owners must ask and answer the question of what they hope to gain by expanding. What are the specific goals that are being sought with an expansion? These goals must be fully fleshed out before the decision to expand is made.
How to Expand?
Figuring out how to grow is often the most time-consuming and critical component in making the final decision to expand. How a company should expand depends on a variety of factors including, among other things, the company’s stability during the last few years, cash flow and its long-term financial viability. “How” also includes an analysis of whether it makes more sense to expand a company’s current business into other states or to acquire an existing business. Both have their challenges that need to be thoroughly analyzed. For example, expanding an existing company can be easier because the company is already familiar with its products, services, management and client base. Expansion by purchasing an existing company can be more difficult because the company may have to move outside of its niche and manage some uncharted territory.
The Importance of Stability
One of the key components in deciding if the time is right for expansion is to determine the company’s stability. If a company has been stable and profitable during a three- to five-year period, the company might be ready for growth. However, if the company exhibits marginal or low-level gains, it might not make sense for the company to expand at this time. Either way, expansion does have many pitfalls of which business owners must be aware. Awareness of these major pitfalls can help reduce the risk of failure and, even worse, driving an existing company into bankruptcy.
Major Pitfalls of Expansion
Failure to Know the Numbers
Owners must have an honest and accurate picture of the company’s financial health. When a company is smaller, it is easier to track financial viability, cash flow, assets and liabilities, and creditworthiness. However, as a company grows, it becomes far more difficult to track and requires a more hands-on accounting solution. If an owner does not have a clear picture of the company’s financial status before expanding the growth will almost always backfire. It is important for an owner considering expansion to spend some time with a qualified accountant and review the company’s financial health. This is something that should be done in the early stages of the expansion analysis.
Understand Sales Versus Profit
In conjunction with the financial viability of the company, it is important for owners to focus on the distinction between sales and profit. Often owners are focused solely on sales as a way of measuring their companies’ health and well-being. However, profit should be the measuring stick, not sales. If a company is generating $5 million in sales annually, but ends up paying out $3 million in losses and liabilities, the company’s financial picture may not support expansion. A common mistake made by many executives is to focus solely on sales. If sales are not producing an adequate profit, the company should focus on balancing sales and profit before expanding.
Another potential pitfall is the loss of key employees or the creation of inefficient management because key management personnel are spread too thin. Finding the right people, especially a management team, is one of the keys to success in any business. If a company has developed a key management team and now needs to spread them thin during the expansion, they most likely will not produce the same results that they are known for.
It is important to understand that as the company expands, qualified and trustworthy management teams also must be expanded. An expanding company cannot pile so much responsibility onto the existing management team that it causes key players to become so overwhelmed that they leave the company or become ineffective in their role as a team leader.
Before any expansion, it is always a good idea to have several meetings with existing managers and discuss the logistics of the change. It will help the owner gauge the attitudes of the managers as well as their ability to take on additional or expanded tasks.
Continued Quality Service
If a company has had stability and a strong reputation in the past, the policies and practices that created that reputation must move forward through the expansion. Often, as a company expands and becomes overwhelmed with the process, quality service begins to diminish. Shortcuts may be taken that ultimately hurt the reputation of the underlying company. It is critical for companies that are expanding to maintain the level of quality service in all elements of the business, whether in client development, marketing and advertising or work product.
As a company grows and expands, so too does the potential for liability. The risk of liability is inherent in business; it is particularly high in the construction industry. No analysis of expansion can be complete without a firm grasp on the possibility of expanded liability risks. It makes sense for owners considering expansion to meet with their legal counsel to determine what the increased liability risk could be and whether they have the resources to handle the potential liability.
In conjunction with the liability risk analysis, owners need to be aware of the increased cost of insurance premiums. This seems like a simple issue, but is often overlooked by overzealous owners who jump headfirst into expansion without properly analyzing the why, what and how.
Finally, if a company is expanding into other jurisdictions, it must be aware of all state and local compliance issues. Conducting business in a state other than where the company is based often requires corporate and tax registrations as well as state and local licenses. Failure to comply with state and local regulations can result in significant and sometimes daily, fines and have a massive impact on an expanding company’s finances.
Growth and expansion can be very rewarding when owners are clear about their goals and projected outcome and have done their proper due diligence with an honest and critical self-examination of their company. Growth and expansion require patience, organization, and a solid support team. Being aware of the issues and pitfalls discussed above can help prevent the disastrous effects of forced growth.