Growing your business: the different options

The last two years have been an uphill struggle for many small businesses (you could also use the help of small business accountants); social distancing restrictions and repeated battering by multiple lockdowns resulted in 23% of small businesses experiencing a loss of revenue during the pandemic. With many succumbing to the pressures of COVID-19 (21,000 additional businesses failed in March 2020 compared to the same month a year earlier) gaps in the market are waiting to be filled: now could be the ideal time to think about future growth.

There are several ways businesses can grow: organic growth, mergers or acquisitions, alliance with other companies or franchising. Statistics from Guidant (2021) show that most small businesses (58%) start from scratch and build themselves up. Eighteen percent buy an already formed business, 19% enter franchising arrangements, and 6% buy into an existing franchise location.

Business growth is far from easy; cash, relevant knowledge and a great deal of motivation are needed to succeed, whichever growth method is pursued.

The UK government published a report in 2015 indicating that three quarters of small businesses wished to expand over the subsequent three years. The study found a correlation between growth success and making some form of improvement to the business to achieve their targets (such as additional investment or exporting goods). Business owners who showed greater ambition and reported fewer obstacles in implementing new processes accomplished the best rates of growth.

Organic growth

Organic growth refers to business growth through the development of internal resources. It is generally the least risky option; products and services can be developed in line with the company’s existing branding and business culture. Current cash flows are usually sufficient to fund resource development meaning large external debts can be avoided. It’s also an expansion method that prevents dilution of control – the current owners will retain their shareholding in the same proportions.

But it takes time – often years – for growth to manifest.

To optimise the use of internal resources, companies may pursue certain strategies: developing new products, increasing existing product sales, improving process efficiency (lowering costs), reallocating resources, and expanding into new retail channels (e.g., online sales).

New product development

New product development is particularly effective if a gap in the market can be identified that your goods or service will fill. It requires specific knowledge and research but is also an excellent opportunity for a company to gain real insight into a market or product.

Product development will likely need some sort of funding, and external knowledge may be needed. Market research is vital to avoid investing resources into a product that no one wants.

Increase sales of existing products

Customers are key to increasing sales. Existing customers can be nurtured through loyalty reward schemes (for example, Tesco Clubcard or Amazon Prime), or personalised marketing strategies to boost spend per customer. Attracting new consumers is a different beast altogether and can prove challenging in a competitive market. Consumer switching costs vary depending on the product or service; someone tied into a mobile phone contract is unlikely to leave early due to the money they’d forfeit, but the switching cost of picking up a loaf of bread from one store compared to another is negligible.

Incentives can be offered to encourage uptake of a product of service. Free trial periods or money-back guarantees (the various high-end mattresses spring to mind) have proven successful time and again in increasing sales. These methods rely on customer inertia – people are generally uninclined to put in the effort to return a product unless there is a very pressing reason. Customer discounts or, even better, free gifts (tangible benefits are perceived as being worth more than a discount of the same value) can attract new consumers to a brand.

Online marketing is a valuable tool when it comes to boosting sales. Social media in particular is one online marketing channel that could amplify sales (if used well). Gymshark is a fitness apparel company founded by Ben Francis in Birmingham in 2012. One of the biggest contributors to the company’s rapid growth was its influencer community – it sponsored various YouTube and Instagram influencers to promote the brand to their several million followers. The company now has a huge social media presence… and a massive company value.

Tapping into new markets

It may be time to look for an entirely new market altogether; overseas export opens a whole world of options. Admittedly, before 31 January 2020 (the UK’s formal exit from the European Union) this would have been simpler than currently; in January 2021 following the end of the transition period, UK exports fell 46%. Fluctuations in foreign exchange rates add an element of uncertainty; a downturn in the value of GBP could wreak havoc to incoming cash flows.

We discussed some of the merits of expanding e-commerce channels in an earlier blog post. Online sales certainly proved to be a life saver for many companies during the pandemic. Online sales in January 2022 were 3.6% higher than pre-pandemic levels. The proportion of online sales the same month was 25.3%, which is trending downwards following a peak in February 2021, but likely represents the reopening of stores as we settle into life with COVID-19, rather than a drop in absolute number of online sales. Surprisingly, it is estimated that 28% of small businesses do not have any form of company website.

Mergers and acquisitions

A merger is the joining of two companies that were previously separate, and an acquisition is the purchase of at least 51% of the shareholding in another company to gain control. Both these options generate much quicker growth than organic methods and can provide immediate access to a whole different brand and market without too much additional work (providing the company bought or merged with already has these).

Acquisitions are an opportunity to buy valuable assets (such as intellectual knowledge held by the acquiree) and for cost saving, by lumping together purchases from a single supplier network or streamlining distribution and advertising etc.

The biggest downside by far to mergers and acquisitions is the cost – large amounts of new external debt are likely to be needed. Cultural clashes, customer loss (through dissatisfaction at the takeover) and strategy incompatibility can all result in failure. Assets gained may take time to take advantage of fully (such as new technology being integrated across the rest of the group). Sales will show an increase on initial acquisition, but this may be short-lived.

Morrisons’ purchase and subsequent sale of Kiddicare is an example of an acquisition gone wrong. The supermarket chain bought Kiddicare for £70 million in 2011, with a view to taking advantage of its online presence. The businesses did not align well, and three years later Morrisons sold the childrenswear company for only £2 million (less than 3% of its purchase price), quoting lack of strategic role within the core business.

Cooperation with another company

An alliance is a less formal arrangement with another company. The companies do not merge, but instead work together as set out in a detailed legal agreement between parties.

Two (or more) companies may choose to set up a joint venture, which is a completely new company, jointly controlled by the firms. This is a way of incorporating the talents of each individual business into one, thereby reducing risk and benefiting from the profit made and potential cost savings. All companies involved a joint venture can be based in the UK or can include an overseas company. This opens an entirely new geographical market with business input from a bona fide local expert.

Franchising is another expansion method, where a franchiser receives a sum from the franchisee in exchange for use of their brand and business support. McDonalds and Body Shop are two examples. The franchiser benefits from inward cash flow, fewer costs (the franchisee picks up some of these these) and the local knowledge of those running the outlet. In return, the franchisee gets immediate access to a strong established brand and benefits from established business processes.

More Than Accountants can help

We prepare your financial reports on a quarterly (or monthly, if required) basis to give the opportunity for timely corrective action. With regular financial reporting, any inefficiencies in your accounts can be spotted early, allowing you time to address these. We also review your transactions and offer tax advice to ensure you are making the most of your available tax deductions. All these services save you money, which you can then invest into growing your business.

To discuss how we can help in more detail, please get in touch.

Final thoughts

Several business growth options are available for those wishing for to expand. Small businesses are most likely to grow organically, in view of the lower costs associated with this method. This is by no means an inferior growth method and can result in slow and steady growth over many years. COVID-19 has caused the demise of many businesses, providing space for those surviving the pandemic to potentially grow and thrive.

Sources

Anon 2021, 2021 Small business trends: a look at the state of small businesses in 2021, Guidant, viewed 14 March 2022 2021 Small Business Trends & Statistics | Guidant Financial

Bounds A. 2020, Coronavirus claims thousands of UK businesses, Financial Times, viewed 14 March 2022 Coronavirus claims thousands of UK businesses  | Financial Times (ft.com)

Allinson G. et al, 2015, BIS research paper number 216: Understanding growth in small businesses, Department for Business Innovation & Skills, viewed 17 March 2022 Understanding growth in small businesses (publishing.service.gov.uk)

Davies N. 2022, Brexit, two years on – so far, so bad, Investment Monitor, viewed 16 March 2022 After two years, what impact has Brexit had on the UK? Investment Monitor

Lewin F. 2015, Your customers want gifts, not discounts, LinkedIn, viewed 16 March 2022 Your Customers Want Gifts, Not Discounts (linkedin.com)

Anon 2022, Retail sales, Great Britain: January 2022, Office for National Statistics, viewed 16 March 2022 Retail sales, Great Britain – Office for National Statistics (ons.gov.uk)

Anon 2021, 28% of small businesses don’t have a website, according to new survey data, PR Newswire, viewed 17 March 2022 28% of Small Businesses Don’t Have a Website, According to New Survey Data (prnewswire.com)

Cook J. 2020, How Gymshark became a $1.3 billion brand, and what we can learn, Forbes, viewed 17 March 2022 How Gymshark Became A $1.3 Billion Brand, And What We Can Learn (forbes.com)

Mattinson A 2014, Morrisons sells Kiddicare for £2 million to Endless, The Grocer, viewed 17 March 2022 Morrisons sells Kiddicare for £2m to Endless | News | The Grocer