By Kathy Jonas
Just as a toddler learns to walk incrementally by scooting, crawling, falling down, and pulling himself up on a piece of furniture, small businesses experiencing growth need to inch their way towards expansion and increased profits.
“This is where companies tend to hit the wall,” says Michael Collins, managing director of Building Industry Advisors, Chicago. “You need to make sure that the business model is set up so growth turns out to be profitable.”
In 2011, following the horrible economy of 2008-9, Collins says many businesses started experiencing favorable revenue numbers and took that good news as a sign to expand and grow. But doing so without proper planning and expert advice resulted in companies on the brink of failure due to an inability to perform successfully or having inflexible lending relationships.
For example, if a company experiences five percent growth, will that company remain profitable if an additional crew needs to be hired or an expensive piece of equipment needs to be purchased?
Several different issues need to be addressed in order to come out of the experience on top, asserts Collins. Just a few pieces of advice include:
• Take a careful look at your current financial relationships. Make sure those relationships are poised to grow with you. Collins says working with your current lender is easier than starting from scratch with a new one. On the other hand, it might be time to shop around if you’re not happy with your lender or if that lender is not prepared to grow with you.
• “Don’t surprise your lender.” Collins stresses the importance of detailed, accurate, high quality, transparent financial reports. These might include monthly statements (preferred to quarterly), audited or reviewed statements, profitability by product line, independent accountants and continuous inventory rather than estimated inventory. During the difficult times after 2008, he says some businesses were reticent to talk with lenders because there were fears of credit lines being pulled, but today transparency is key.
• Make sure you’re equipped to take on expanding financial responsibilities by hiring or upgrading employees who are charged with making this happen. “You don’t want to expand your financial relationships unless you have repay capabilities,” says Collins. This might mean making a payables clerk a true controller or changing a controller to a CFO. “This will resonate with lenders,” says Collins. “It shows that you are ready to handle the growth, or you may not get the capital you require.”
• Make sure you have a team in place to process the additional business. If the owner has concentrated on sales and business development, it might be time for a sales manager to be hired to help. If someone spends a lot of time on fixing equipment, an operations manager could be needed. “Ask department heads, ‘if we expand, where would the bottleneck be?’ Would it be a particular saw or piece of equipment, or personnel processes?” asks Collins.
• If you do hire a CFO or purchase a big piece of equipment, will you be prepared for leaner times? Soft patches need to be anticipated as they happen in any business, according to Collins.
Collins also recommends becoming more attractive to lenders by strengthening your financial value prior to going to a capital provider. One of the strategies he recommends is doing a thorough examination of your current customer base. “If you’re giving your customers 45 or 60 days to pay, you are acting as a small bank for those customers,” he says. He adds that those extra 10 days can make a difference in terms of freeing up money. He says these customers might have been given a break during leaner times and you probably won’t lose them over the new terms.
“Tell customers you are trying to get on a more normal footing and are going back to regular 30-day terms,” says Collins.
This is also a good time to look at customers who might not be worth the difficulties you experience with them. Those customers who regularly pay late and might have been given lower prices due to being a legacy customer become more of a liability than an asset. Collins advises cutting them loose as a measure to tighten your customer base. “Even if they pay on time, look at the opportunity cost of working with them rather than the other guy. You are getting less financial benefit from that one difficult customer.”
He said that many companies putting together a business plan fail to address key aspects important to a capital provider, such as: financial projections, full historical financials (balance sheet, cash flow statement, accounts payable and receivable aging reports), business overview and history, detailed descriptions of products, descriptions of trends and trends driving demand in the market served, and strategies for growth.
Some common mistakes to avoid when considering an expansion include increasing earnings by cutting employee benefits (see related article on page 8), scaling back customer services, decreasing advertising and marketing or eliminating training and development, says Collins. In reality, he asserts that maximizing your company’s value and strengthening its position may involve doing just the opposite: increasing the sales force through an ongoing recruitment program as well as developing programs that aid in employee retention.
Expert advice when contemplating growth is critical and not intuitive, says Collins. Just because you have done well does not mean you’ll be able to profitably capitalize on that growth, and finding that delicate balance is challenging. Fortunately, the strength of the current market provides an additional safety net. RB
Michael Collins began his career at A. G. Edwards & Sons in 1994 and in 1995 became an investment advisor at what was Dean Witter Reynolds. Several years after that company’s merger with Morgan Stanley, he joined the high net worth client division of Morgan Stanley. He co-founded Building Industry Advisors in 2012 and currently leads his firm’s efforts in mergers and acquisition advisory and raising capital for building products companies.
He focuses on the building materials distribution and window and door segments, areas in which he has conducted extensive research. This includes publishing the “Foreign Competition Report” for the U.S. Building Products Industry, speaking at numerous industry meetings, and writing monthly articles for Door & Window Market magazine, ProSales magazine and other publications.