A regular discussion we at Advice Centre Consulting have with business owners revolves around the optimum size a business should be. Many business owners want to know the point in the development of a business where further growth will have a negative impact on profitability and provide greater challenges in maintaining very personal client relationships, a family like culture with employees and a comfortable and (mainly) stress free lifestyle for the principal(s).
It is our view that there is no optimum size for a business – there are many great businesses that have remained in a “smaller model” and equally many great businesses that have grown to be global giants.
But whichever strategy best aligns with the personal, lifestyle and business objectives of business owners – a growth or consolidation strategy – there are a number of trade-offs.
In discussing these trade-offs, let’s look first at the key reasons to remain in a smaller business model. First and foremost for most business owners choosing to “stay small” is that they retain greater control. Nothing happens without them being involved – although this often becomes a disadvantage over time as the business is so dependent on the owner that taking time off becomes difficult. This control includes control over costs, control over people employed control over client relationships and control over the type and quality of service.
Another very common reason for retaining – or even retreating to – a smaller model is less people issues. Many business owners experience growth to the point that they no longer are involved in what they enjoy because all they seem to do in a larger business is deal with people issues. They therefore make the decision to retreat to the business size when work was fun!
Less stress and a better lifestyle is also a common reason influencing the smaller business model. Having greater control of everything including the input from the business owner, the hours they work etc and not having major people issues to deal with contribute to an enjoyable lifestyle with less stress and aggravation.
Maintaining a personal service culture and deeper relationships with clients is also a reason for “staying small”. This reason is often presented with the assumption that if your business grows to a larger model then it is impossible to deliver a high quality of personalised service. We would debate this although acknowledge that an outcome of business growth with many businesses has been the loss of personalised quality service. However there are many examples of large businesses that have been able to continue to deliver a first class personalised service – think Sofitel Hotels, Disney Theme Parks and Macys Department Stores.
But while these reasons for choosing to “remain small” in business may seem attractive, there is long list of trade-offs.
At the top of this list is the difficulty for smaller businesses to attract and retain talented people. Talented people need opportunities to learn and develop and move into more challenging positions – and it is only the growing business that is able to provide these opportunities.
Clients are becoming more demanding – experiences such as convenience, greater choice, more flexible hours in which to ‘do business’ and accessing a number of service components from the one supplier are all growing in importance for today’s consumer. And it is only the larger business model that is able to deliver to these demands effectively.
The costs of operating a business are rising – the costs of technology, business infrastructure, marketing, compliance, and day to day business operation are only moving in the one direction. The larger business has the benefit of economies of scale and is able to absorb these increased costs and return to owners the profit levels to which they have become accustomed.
If you believe valuation is a function of the future it will only be the growing business that is able to attract higher business valuations. No matter what the valuation methodology, a business that demonstrates continual revenue, profit, client and service growth will be more attractive to potential buyers.
Smaller businesses find implementing a premium pricing structure much more challenging than a larger, growing business. This is often because the next ‘sale’ is far more important to smaller businesses that the risk of a higher price is too much to take! Not being able to implement premium pricing often provides an additional barrier to realising higher profit ratios.
And forming effective professional alliances is typically far easier for larger businesses than it is for those remaining in a smaller model. Partnering with other professionals, service providers and manufacturers is a strategy effectively applied by many businesses to increase their product and service range needed to satisfy their more demanding target markets. Smaller businesses find effective professional alliances more difficult to attract and retain than larger businesses.
So a decision for most small business owners at some stage of their business life will be whether to implement a growth strategy or remain in a small business model. Weighing the trade-offs is a critical part of this decision making process.
