You want to grow your company to achieve annual revenues of $5 million within the next 3 years. Your 2020 revenue will be around $3 million, and your gross margin is 50% or better. Is it possible for you to achieve your goal? How do you decide whether to build a new service/product line organically or buy a company? Let’s look at a simple sample company as an example.
Ideal Landscapes provides landscape maintenance services to commercial and residential customers. It is located in the upscale suburbs of a metropolitan area that is growing steadily. Current clients include hospital campuses, large shopping malls and some HOAs as well as large estates in select areas. Offerings include lawn mowing, turf care, small tree and shrub care and design/build for high-end residential clients. Ideal limits installations to projects that sign a two-year maintenance services contract following project completion. Ideal currently has 25 employees and are all e-verified.
Even if the owner assumes, he and his team can grow the current business at a rate of 10% over the next 5 years (compounded, which is an aggressive rate) he realizes they still won’t get to the desired $5 million revenue goal for at least 5+ years. In addition, to double the existing size of his company while maintaining his current gross margin will require additional resources, process, technology and management time.
The owner has outlined the vision for his senior team and they are enthusiastic about the goal and their opportunities in a dynamically growing company. The team is having a strategic planning session to map out the alternatives and come up with their plan before moving into operational/tactical planning for 2021. Options being considered include:
Option 1 – Expand services and product offerings for the existing clients.
Most of the business owners we speak with have clients asking if they provide other services.
Option 2 – Expand geographically.
The team has identified additional areas to be added to their existing target market. They currently have one satellite location and think there may be more possible.
Option 3 – Expand the target client market.
Ideal has limited their target market to referrals to and to property manager/relationships they already have. There are other potentially lucrative clients in their area that could become their customers.
Each of these options will be fleshed out by the team as follows:
- What is the potential market for this option and how saturated is it already? Who would we be competing against? How do we win clients (level of customer attention, pricing, product mix, etc.)?
- What resources will we need in order initiatives to be successful, management commitment, resources, planning and communication are essential? Does Ideal have the management time and energy, new or updated technology, new processes and/or new employees that will be required? Are there new suppliers? New certifications? New consulting and or leaders/managers needed to achieve this goal?
- What are the financial resources needed to achieve the goal? How much will it cost to pay for new equipment, materials, consultants, employees and tools?
- How do we model financial cost and expected returns into this decision-making process? What about the cost of the money we will have to borrow or the cost of capital for profits reinvested? How is risk analyzed for each option?
- Is there a seasonal aspect that will impact the cash flow of the business as a whole?
- What additional incentives/compensation should be built into the program to create incentives for the team to execute these new goals?
Each team has prepared their response as homework prior to entering the strategic planning session. They’ve all had time to gather facts, build an outline of their SWOT analysis for each option, and worked with a consultant to model their assumptions in pro-forma projections. Next step: present the analysis to the whole team and gain consensus on moving forward. See Buy and/or Build, Chapter 2, in a future blog posting to see what the homework looked like.
If you would like to discuss your situation on a confidential basis, please do call Alison at 224-688-8838 or email me at [email protected]. We’re here to help you Harvest Your Potential.