Wealth Insights
How Scalable is Your Business? Factors to Consider

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Ask these important questions before you finance new growth or take steps to expand your business.

One of the hot buzzwords to come out of Silicon Valley is scalability, but it doesn’t just apply to technology startups. Business scalability speaks to a question every business owner asks: How much growth potential does my company have?

It’s no simple question, says Matt Welch, Managing Director in Regions Securities Corporate Finance Group, where he advises clients on proposed mergers and acquisitions, as well as divestitures, and whether capital investments will boost growth or put their businesses at risk. He recommends that business owners ask the following questions to determine how scalable a business really is.

WHAT DO YOU WANT TO ACHIEVE?

This should be the first question, Welch says. Do you want to dominate your sector, or incrementally increase market share and profitability? Do you want to sell the company, or do you want to pass on a stable, profitable business to your family?

He notes that each business will have different objectives, in part because they have different stakeholders. “A small family-owned business will usually have a limited number of stakeholders, while a larger enterprise may have a variety of different stakeholders—even if it isn’t a public company. Some businesses are operated to maximize dividends or pay back debts to lenders, while others have to consider a broader stakeholder base in their family, community and employees.”

WHERE DO YOU PROJECT GROWTH?

Business owners like to think they know their industry better than anyone else—and usually they do. However, Welch says business owners should always look twice when considering new avenues for growth and business expansion.

“Get into the weeds,” he says. “Go account by account, product by product, or vertical by vertical to find where the potential growth resides. Focus on the most profitable segments.”

A deep dive can challenge long-held assumptions and uncover new opportunities. You may find that a segment of your business is underperforming because it needs a straightforward technology upgrade or more sales resources. A thorough review usually leads to a richer analysis and better questions, Welch says.

WHAT’S YOUR PLAN?

Once you’ve defined your goals and found the areas primed for growth, it’s time to fill in the details. “Whether it’s a formal business plan, a hundred-page proposal or a high-level strategic vision in the CEO’s mind, every business leader needs to think through potential outcomes, market/competitor reactions, unforeseen macro and micro events, and to plan for all potential outcomes before embarking on a new strategic direction,” Welch says.

That plan should include a marketing strategy to increase awareness and customer acquisition and plans to cover the costs of scaling the business. Welch also stresses the importance of establishing a clear time frame for your strategy.

“Are you able to grow at a higher rate than the population grows, or at higher rates than your competition?”

WHERE DOES YOUR BUSINESS FIT IN?

Taking a deep look into your business is only half the battle when considering a growth plan, Welch says—the next step is to look outside of it. What are the trends in your industry? What is the competition doing?

Some businesses, like a landscaping firm or a family restaurant, face more geographic limits than a company that sells accounting software. For a locally focused business, the population growth, economic forecast and real estate trends in the company’s footprint are essential factors in any business owner’s decision.

ARE YOU PREPARED?

“Is your infrastructure—your technology and your back office—strong enough?” Welch asks. “Do you have the staff and team in place to support the projected growth? Or do you need to invest more before you can make that big push?”

Growth places new stresses on existing staff, while new staff can take time to train and get up to speed. Owners should look at their operation and project management processes, Welch says. Delays can add carrying costs, hurt morale and hamper new initiatives.

IS DIGITAL DISRUPTION A FACTOR?

Welch notes that entire industries are being turned on their heads by technology. That’s why it’s vital to keep a close eye on the digital frontiers of your business. Ten years ago, for example, the owner of a car service or taxi company might not have thought twice about significantly expanding their car fleet. Now, with new transportation apps and networks competing for customers, that move might not make sense.

For existing businesses, moving in a more digital direction also comes with risks. Many restaurants that initially signed onto food-delivery apps to increase sales haven’t necessarily reaped the benefits they expected. “A lot of high-end and even casual restaurants are not using them anymore because it’s a race to the bottom,” says Welch, noting that the services often take 20% off the top of the order value and struggle to deliver the food in a timely enough manner to preserve the same experience in the restaurant.

ADDING IT ALL UP

In the end, the decision to embark on business expansion hinges on business owners determining their risk-reward appetite, Welch says. Some entrepreneurs get cold feet at the precipice of a transformational shift in strategy or a significant acquisition.

“But remember, there can also be risk associated with inaction,” he says. “There are many instances where large companies could have bought smaller competitors, other businesses below/above them in the value chain or businesses tangentially related to the industry long before they grew into true threats and lived to regret it. And that happens among local businesses, too.”

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