Is business expansion always the best way to grow value?

Published March 16, 2016 by Dan Doran, CVA CEPA

Is expanding your business always the best way to boost its value? Overall, yes. If your goal is to increase the value of your business, then you need tactics for growing your company. You might expand by targeting a new segment of your market and focusing your sales efforts there. Or perhaps you acquire a business that you can improve. Regardless of your strategy for growth, the most important way to move the dial is to grow profit. Let’s look at a couple of ways to grow profit through expansion:  

Expanding by scaling your business.

Scalability is about answering the question: how big can you get?  How profitable will you be? How fast can you get there?  And finally, what will scaling your business cost?

When thinking about scaling, look closely at your product lines. Which has the largest addressable market?  Identify and rank your product lines by potential. Adding a product (or service) simply because it is easy doesn’t necessarily drive value to shareholders. Calculate the profitability of each product line to see if you’ll achieve economies of scale. If not, and you anticipate that margins will remain static, it’s wise to look at scaling a different product line. 

Know how much scaling will cost.  Growth isn’t free, or necessarily cheap.  Capital expenditures, adding distribution, a sales staff, research and development…there are myriad costs associated with scaling up. Do the work to detail costs. 

Know how fast you can grow. 

Some growth initiatives can start immediately while some may take a number of years.  Ultimately those that start sooner can start throwing off cash sooner.  The trick is to balance “now” versus “volume.”

Expanding through acquisition.

An acquisition is ultimately a “build vs. buy” decision. Acquisitions, when done right, can jumpstart the expansion process.  Consider an acquisition if:

• You don’t have the know-how to grow a product line
• You don’t have the management resources to oversee a growth initiative
• The target company can add a product line (or service) that currently isn’t an in-house capability or strength
• You can access acquisition capital cheaper than working capital for growth
• You can accelerate the timeline for realizing growth or margins on an in house capability.

When does an expansion NOT drive value?

Growth eventually needs to lead to profitability. It’s not uncommon for a startup to operate at a loss as they try to grow. We see expansion strategies go wrong if the company pushes revenue growth without a plan, especially for a non-venture backed company. Sometimes the most aggressive attempts or quick decisions to expand end up compromising value.

Ultimately growth drives value, and as a steward of your company your obligation is to return value to shareholders.  This is just as true when you are the only shareholder as when you are simply management.  By following a structured plan to analyze growth opportunities —  including acquisitions when appropriate — you are embarking on a path to returning real value to shareholders. 

About the Author:

Dan Doran is the founder and principal of Quantive Business Valuations, a certified valuation practice serving privately held businesses nationwide.