Business Transitions And Growing Pains

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This is a season of transitions. Being a university professor, the end of the semester brings some degree of reflection regarding the future of these bright minds as they progress onward in their life’s journey to their first career job, summer internship, part-time summer job, etc.

It’s a transition period for school kids as well, as moms and dads look to the summers with both dread and excitement. I am reminded of this, having just returned from my oldest grandson’s eighth grade graduation ceremony. Seriously? A ceremony for graduating from the eighth grade? When I finished the eighth grade, the teachers just said get the heck out of here and on to high school!

All of these circumstances, of course, are examples of evolving from the big fish in a little pond to the little fish in a bigger pond. Businesses experience this phenomenon too, as they grow from small businesses to larger ones. Growing up on a mom-and-pop nursery myself, I remember the growing pains associated with becoming a larger business well — mainly those associated with trying to satisfy the needs of a greater customer base.

Financial And Strategic Growth Requires Added Labor And Capital

When green industry businesses expand, they do so financially, with either retained earnings or by using debt capital, or strategically, by expanding their existing operations, adding another location or engaging in merger or acquisition (M&A) activity. Whichever way they decide to grow, it takes additional labor and capital.

8 Questions To Ask Before Expanding

Before you start down the trail of growing your business for the sake of growth,
ask yourself these questions:

• What’s the downfall with remaining the same size as you are now?

• Are your competitors doing better than you? Why? How? Is it related to how big they are compared to you? Are your competitors expanding?

• Do your brand and message confirm that you should be chosen by new and/or larger customers? Can you answer the question, “Why should people bother to buy from you?” What makes you different from the rest?

• Do you have the right people in the right seats? How will the effectiveness of key employees change if the company is larger?

• How much will it cost if it flops? For example, if a growth-related investment requires you to carry a large inventory, add extreme overhead or change your current mode of operation, it should be carefully considered. You should have an idea of how much it will cost if you fail.

• Will your customers love it? Will they tolerate your growing pains? Taking risks for any other reason than delighting your customers is the riskiest business of all. Take risks when your customer will love you for it, and avoid risks for any other reason.

• Are there economies of scale that you will experience from being an
expanded operation?

• By expanding, are you diluting beyond recognition the passion that originally started the business?

Another interesting point about expansion is that no matter which green industry sector one competes in (grower, landscape service provider or retailer), growth involves what we refer to as lumpy investments. That is, in order to grow to the next level, there is a set of expenditures that are necessary in terms of capital expenditures, labor resources, lines of credit, etc. Using these expenditures, the firm may expand their operation from $1 to $2 million in sales, for example, before another lump of expenditures is needed to grow to the next level of sales.

Invest More In Your Business Than The Bank Does

The reason I am discussing this aspect of company growth is that I have been asked by several firms, who are considering making investments to expand their operations, whether or not it is a good time to be doing so. The answer, as usual, is maybe.

If making an investment to grow your business right now involves securing debt capital to the point where the bank has more skin in the game than you do, then no, it is not a good time to invest. Our industry saw all too well the effects of being over-leveraged in the midst of the last economic downturn. Leverage can be a good thing when times are good. You can grow your business at a faster rate than without it. But when times are bad, it comes back to bite you in the rear big time.

Merge And Acquire Strategically

Another phenomenon I see in our industry, depending on where we are in the business cycle, is merger and acquisition hubris. In other words, when M&A activity starts increasing, like it has in the first half of this year, firms in the industry get a little antsy. Their proverbial trigger fingers start getting a little twitchy, and I’ve seen firms make investments for entirely the wrong reasons. The investments they make are non-strategic.

On the other hand, the recovery periods after recessions are often some of the best times to make investments that are strategic in nature. The
reduced value of assets in the market can translate into some really good bargains. If strategically it makes sense, don’t be swayed by media
rhetoric and pass on good opportunities out of fear. As the saying goes, fear keeps us average.

Account For The Learning Curve And Culture Clash

Recognize, though, that making such investments may make sense strategically, but they are often accompanied with some rather steep learning and experience curve effects. Using my little fish, big pond analogy, it is possible that firms can grow to the point where they start experiencing diseconomies of scale. Then, per-unit costs actually start increasing instead of decreasing as you’d normally expect.

In addition, if M&A is the growth strategy employed, the number one hurdle facing companies becomes combining the corporate cultures of the firms being merged or acquired. I’m completely serious here — it’s the number one hurdle. Combining assets, processes and systems is the easy part. Getting folks that have been motivated and incentivized by differing methods to suddenly act as a cohort is simply an unrealistic expectation. It takes careful, skillful teambuilding to do it right.

Charlie Hall (charliehall@tamu.edu) is a professor and Ellison Chair in International Floriculture at Texas A&M University.

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