Published December 1999
External Growth Strategies
The right one can set you on a course for rapid, profitable expansion.
Realizing your business' growth potential is one of the most challenging and rewarding pursuits you face as an entrepreneur. A properly executed external growth strategy can help you realize maximum growth potential at the right pace-particularly when internal growth opportunities are limited by financing or other constraints, or aren't the best choice in terms of strategic opportunities or shareholder objectives.
To develop a practical and effective external growth strategy, you need to understand your business' current state and your options for achieving your future state.
Establishing Your PositionBefore you can chart a course for where you want to be, you must understand where you are. You need to assess your current state - your business and your market position.
Consider these questions: Have you been experiencing rapid growth that's straining your resources? Restructured in order to return to profitability? Do you have a strong, 'deep' management team? Limited - or excess - production capacity? Has your software or other technology reached the peak of its life cycle? Are there any new products in development? What's your financial capacity? Do you dominate your market?
And what about your personal and corporate objectives? Undoubtedly, you want to maximize the value of the business and your personal wealth as a shareholder. And you also want to achieve your corporate goals, which may include international expansion, rapid and profitable growth, diversification, maintaining corporate culture or retaining key people.
Mapping Your RouteThere are many external growth strategies available to an expanding company. They include entering new markets, divesting or acquiring new business units, strategic alliances, partnering relationships and mergers.
As part of the process of selecting an appropriate strategy, you need to consider the targeted outcome of your growth plan, whether it's product/market integration, geographic expansion and diversification, added capacity, competitive market advantage, reduced business risk or the acquisition of key people.
A key benefit of strategic alliances, partnering relationships and mergers is that they allow you to share risk and resources when entering a new market. These growth strategies also present the opportunity to develop more expertise, or take advantage of an existing strong management team with excess capacity. Appropriate growth strategies also address opportunities for diversification, realizing business synergies and achieving product rationalization. Note, however, that strategic alliances, partnering relationships and mergers also require you and the other party (or parties) to agree on mutual expectations and governance issues.
Divestiture of non-core operations, in addition to allowing you to focus on core businesses, offers you the opportunity to increase liquidity and realize the value created in maturing business segments.
Funding The VoyageFinancing remains a key element in any growth strategy, of course. You can generate expansion capital through cash flow from operations, the sale of non-core assets, private placements, strategic alliances, revised financing structures and banking arrangements, tax structuring and through the public markets.
To ensure your growth goals are realistic and can be financed given current alternative financing sources, each strategy should be modelled using alternative financial structures. This value analysis confirms your course of action from a financial perspective.
In assessing your business' financial structure, 'hidden value' can often be found on your balance sheet. It's not uncommon to achieve greater financial flexibility by renegotiating or replacing existing credit arrangements. For example, senior debt capacity can often be enhanced with asset-based lenders.
Achieving Your Future StateIt can be difficult to determine the most appropriate external growth strategy for your business. It can be even more difficult to determine how to finance it. That's where the experience and expertise of corporate finance professionals comes in. A corporate finance professional can work with you to:
- Establish a clear picture of your business' current state, market position and objectives. Explore your external growth options, assessing each strategy's merits and implications in relation to your objectives, your business' future value, and your ability to finance your next growth cycle.
- Obtain financing for your growth strategy, assessing alternative financial structures and introducing you to appropriate sources of financing.
- Assess the appropriateness and implications of the financing terms.
Doug Lucky is a vice president of Ernst & Young Corporate Finance Inc., a firm providing financing, acquisition and divestiture advice to growth-oriented entrepreneurs, and can be reached at (905) 277-7282 / firstname.lastname@example.org.