Businesses, like people, mature. Their growth stops and their energy level may slow down. Many become set in their ways and are resistant to change. In other words, like people, companies get comfortable; even those that started with exponential growth.
Businesses based on cutting-edge innovation are not immune, either. The recession may have brought businesses’ plateaus to the forefront, shaking business owners out of their doldrums, and forcing them to make changes. But change does not automatically equal success.
Businesses that have hit plateaus are generally well established, and their year-over-year revenue increases have faded. They are typically still profitable, but the owners find themselves taking fewer risks and making fewer investments. Issues such as changing customer requirements, consolidations among customers, increased competition, and industry-wide changes also may be chipping away at growth and profitability. It is easy to identify a plateau in your business by looking at a detailed analysis of the numbers a business can easily obtain or track. New customer acquisitions slow down dramatically year over year. Average revenue per customer may flatline or even decline. Gross profit margins by product or service may level or drop, and product turnover or service staff utilization may decrease or level off.
There are operational signs, as well. As equipment becomes obsolete, a business owner may balk at the cost of upgrades and all the related employee training required. New products and services are not being introduced at a rate they once were, and innovation and ideas are at a standstill.
To push out of this plateau and jumpstart growth, owners can stay the course while squeezing out operational efficiencies as long as possible, or they can make big changes, such as selling the company or merging with another company. They can expand the business by adding product lines or services, moving into new geographies, or selling into new industries. Another option would be achieving all of the above through an acquisition. While going with your gut is important, performing a financial analysis can help in the decision-making process.
What Is the Plateau Really Costing You?
A look at the company’s balance sheet, cash flow statement, and income statement should be able to help answer the following: Does the business have cash reserves? Is it carrying debt? Are the business financial statements attractive enough to banks or other lenders that capital will be readily available? How is the current cash flow and what are the profit margins? Next, conduct a trend analysis of the past five years. Then compare the data to your industry or industry segments. (You can find industry data through industry associations, industry trade publications, and annual subscriptions to Risk Management Association’s and MicroBilt’s Integra industry reports.) Prepare a projection of cash flows, revenues, and profitability over the next two years if no changes are made in your business. This exercise by itself won’t provide answers, but it will provide insight and the vital measurements of a company’s direction, health, and the baseline data for a business owner’s decision. If the projection predicts the company is going to lose revenue dramatically over the next, say, 18 months, relatively quick action needs to be taken, even if the goal is to sell the company. Any potential buyer will most likely per form the same analysis, and the business’s sale price will be greatly diminished.
Is Organic Growth Possible?
A new strategy for growth—whether it calls for diversifying the business or breaking into new geographic markets or industries—requires capital outlays. Costs may include new equipment, additional or replacement staff, additional office or manufacturing space, and new marketing costs. The financial analysis should be designed to determine the risk vs. the reward. It should include a plan for revitalizing the business, which must be developed based on a financial model of the cash that is required to invest, and revenue and profit projections. This financial model can help you decide if the cash outlay will provide an adequate return on the investment or effort. While the need for financial projections isn’t news to veteran business owners, this analysis can be used to benchmark the vision against the actual financial results.
This analysis also will help determine the availability of capital and cost of capital (interest rates) needed to fund implementation of the new strategy, whether it is an expansion or a merger. If the business is deteriorating, quick action is needed to ensure the availability of capital. Few lenders will offer loans to businesses that are taking on water; and if they do, the cost of capital may be prohibitive.
Would a Merger Be Best?
One way to expand quickly is through a merger. Owners of mature businesses typically have a good sense of who their competitors are in their industry. The analysis here centers on the costs involved in merging two companies, and revised financial projections for the newly structured company based on synergies created through the merger. For the sales company that decides to merge or acquire a supplier, it increases its profits by capturing the supplier’s gross profits from the previous sales it made to the company. Additional savings will flow to the bottom line through the economies of scale from the integration of the general administrative staff. Then, business owners must measure those savings against the increased costs of equipment and its upkeep, and cash flow needed to maintain inventory and the supplies for products.
There is no one right answer for how any mature company should move forward. The best path is different for every business, depending, of course, on all the variables involved. Armed with some key financial analysis, though, business owners can plan out their company’s future in a way that helps to ensure long-term success.
Corey L. Massella, CPA, is a partner with the accounting and business consulting firm Citrin Cooperman, and is the CEO of the firm’s SEC Solutions Group. He brings more than 20 years experience in counseling entrepreneurs in financial and business strategies, including structuring, negotiating and executing mergers and acquisitions, completing due diligence and preparing companies for public offerings. He is also a board member and sponsor for the Financial Executives Institute (FEI), Keiretsu Forum and the Long Island Capital Alliance. He can be reached at 212/697-1000 or email@example.com