Chapter five: Transitions
Every business goes through predictable stages: from start-up, the business grows for a period of time and then at some point – and it’s different for every business – sales, revenue and profit stop growing. The business may stay fairly flat for a while, but there will be a time when a decision must be made: if the business has a future, there will need to be new investment. You’ll need to find the creativity, money, time and people to renew the business and put it back on a path to growth. If you don’t, then the business will decline and will eventually close or have to be sold to someone else. Don’t forget that investments also need to be made into maintaining your business, not just expansion. Costs related to ongoing maintenance and replacement of equipment, facilities and processes will also need to be considered in planning your business’ operation and in any consideration for growth or expansion.
This chapter focuses on the main stages that occur during the life cycle of most businesses and the transitions related to growth, expansion and potentially winding down or selling your business.
Growing your business
Before making any plans to grow your business, there are a number of things that you should consider.
Evaluate your motivations for expanding your business and the impact that it could have on your personal and family life. Before deciding to expand your business, consider:
- Are you ready to devote more time to the business, if needed?
- Does your family understand your need to commit more time to the business?
- Will you need to invest some personal financial resources?
- Does expansion fit into your short and long term business objectives?
- Is the return on investment worth your time and effort?
- Will you still enjoy the business?
- Are you willing to take the risk?
- Do you have the right skills to manage growth? If not, where will you get them?
- If your business is home-based will additional traffic to your home affect your privacy or that of your family? Could it disrupt your neighbours? Some communities establish rules for residential areas, so be sure to check ahead.
Your current operations should be relatively stable before you consider expanding your business. Research shows that trying to expand when your business is not ready is a leading cause of business failure.
Growth can put a strain on your cash flow, production capacity and ability to deliver services. Be sure you’re starting on a strong footing. Carefully research your ideas and consider the impact of expansion on your operations.
If you’re ready to move ahead, the next section identifies different ways to grow your business and some of the things you may need to do to achieve your goals.
Identify opportunities arising from your current business
You can uncover business opportunities by analyzing your current business operations. Taking stock of your strengths and weaknesses can help you discover areas where you could be more efficient. Following through on these results can go a long way towards contributing to your bottom line.
Identify any human, physical or other operating assets that you could use more productively. These could include:
- land, space, equipment or facilities
- cash or credit
- licences, trademarks, patents and other intellectual property
- skills, knowledge and experience
- market position
- methods of distribution
Write down business assets that you could use more productively.
Analyze the strengths and weaknesses of your business, and try to determine the cause of certain outcomes. Consider:
- where your operation excels or falls short
- where your operation is innovative or non-productive
- product lines or service offerings that are underperforming
- compliments or criticisms made by customers or others
- weaknesses in your business where competing firms are stronger
Write down your business strengths and weaknesses.
You may want to consider calling on external consultants or business advisor to help you review your strengths and weaknesses.
You can design strategies to improve your business based on both your strengths and your weaknesses. Consider the following questions when designing these strategies:
- What strengths can you use as a basis for expansion?
- Can weaknesses be corrected or turned into strengths?
- Can new opportunities be identified after considering your strengths and weaknesses?
The following section suggests a variety of activities that you can undertake to improve and grow your business. It was provided by Canada Business and more information can be found on their website. Thinking about these activities will help you design a strategy to grow your business.
Words of wisdom on business planning
Andrea Johnston is founder of Johnston Research Inc., an Aboriginal research and evaluation firm:
Depending on the type of business or industry you’re operating in, your business may be highly susceptible to changes in government, changes in the market or other turns of events. Having plans for your business is great but you have to be flexible in order to respond to changes. Planning is a continuous process and you must always be aware of the conditions around you and the environment in which your business operates. You have to be ready to pounce on an opportunity or it might be lost.
At the same time however, it’s important to scrutinize and assess opportunities – not everything is possible at all times. And opportunities don’t always present themselves clearly – sometimes you have to dig a little deeper to explore the possibility of carving an opportunity for yourself out of something that is not necessarily related to your area of business. It’s important to keep an open mind.
Ways to grow your business
If growing your business is one of your business objectives, identify activities that maximize the return on your time and investment and take time to plan your implementation strategy. It also helps to focus on the kind of growth you hope to achieve and that you can manage at this point in the life of your business. There are many strategies you can consider.
Helpful tip: as you go through this section, write down the strategies that may work best for your business. Keep in mind your goals for growing your business. It may be useful to develop your own growth plan.
Implement new or improved business operation processes
Evaluate your business activities and processes to find ways to improve productivity or reduce your costs. Money you save by implementing these changes can be invested in other business activities.
Improve administrative efficiency
Find ways to increase the effectiveness or efficiency of tasks not involved directly in the delivery of the product or service. Business management tools in the form of software or services could help the administrative side of your business. Efficiencies in staffing, planning, budgeting, controlling and managing information could save you time and money.
Evaluating your production processes can help you spot areas where you can streamline your operations and eliminate inefficiencies. This could lead to automating processes, improving facilities, implementing technologies and training employees.
Optimize your distribution
Adjust your distribution system to accommodate market demand or to improve the distribution of your products. Consider activities such as eliminating low volume distributors or consolidating distribution and warehousing.
Find new suppliers or outsource parts of your operations
Make sure you’re getting the best prices from your suppliers. You can also consider outsourcing or subcontracting elements of your business to focus on what you do best.
Take advantage of underused resources
Do you have resources that are not used to their full capacity? Does your business go through periods that are busier than others? You could try to find business opportunities that make constructive use of those resources during the downtimes. This might involve seasonal or periodic shifting of management priorities and training employees to do new tasks.
Grow your business by finding ways to increase sales or target new markets. To increase sales, you may have to introduce new business lines, expand your market, increase your marketing activities and improve customer service. If you’re in manufacturing, this could mean increasing your productivity to meet demand.
Introduce new products or services
Provide a broader range of products or services for your clients or introduce totally new lines. You'll need to research your market to see if there’s an appetite for your proposed offering. Consider testing your idea on some of your existing clients, which can help you manage some of the risks and even help you learn how the product or service can be improved. Pay special attention to marketing and promotion to get the word out on your new offerings.
Expand to new domestic markets
While targeting new markets can be costly, it can increase your client base. Market research will help you understand the potential new market and help you devise a strategy to tackle it. You'll also need to consider marketing, sales, distribution and increasing production to meet the new demand.
Enhance your sales channels
Evaluate and optimize your sales channels. This could help you reach more clients, increase your market control and improve profitability.
For example, you could:
- provide your sales staff with enhanced training
- add retail outlets
- use resellers
- implement an e-business strategy
Improve the efficiency of your marketing activities. Track the outcome of your current marketing or advertising and be prepared to shift your strategy if you’re not seeing your desired results. Study your intended clients to know how best to reach them and plan your marketing strategy accordingly.
Change price, terms or conditions of billing
Changing your prices, terms or conditions of billing could stimulate market demand for products or services. Keep an eye on what your competitors are offering and your own profit margins to determine if you can reduce your price.
Keep an eye on the competition
Always be aware of what your competitors are doing. This information helps you understand their behaviours, capabilities and limitations. Armed with this knowledge, you’ll be better prepared to defend your market position, react to changes and find niche markets.
Improve community relations
Increase your presence and visibility in your community. Activities such as sponsoring community events, speaking at engagements or supporting a local sports team can raise awareness of your business and stimulate market demand.
Don't neglect customer service
Keep in mind the customer’s perception of your service quality or responsiveness. The positive word of mouth from a happy customer is worth its weight in gold.
Know when to pull the plug
Eliminate sectors, services or product lines having low margins, low profitability or excessive selling costs. This can be difficult due to emotional commitments to existing offerings, but in the long run, it can save you money that you can reinvest more wisely.
Expand into international markets
There’s considerable advice and financial support available to Canadian businesses that are interested in expanding into international markets. Export Development Canada has many officials to help you prepare for exporting. You can visit the EDC website for more information.
Before deciding to export, you need to think about the resources and knowledge your business has and consider changes you may need to make to your business to accommodate exporting activities. Consider the following:
- Are your export objectives clear and achievable?
- Do you have a realistic idea of what exporting entails and what it takes to succeed?
- Are you open to new ways of doing business?
- Can your staff handle the extra demand associated with exporting?
- Can you respond quickly to customer inquiries?
- Do you have personnel with culturally-sensitive marketing skills?
- How will you deal with language barriers?
Financial and legal resources
- Can you obtain enough capital or lines of credit to produce the product or deliver the service?
- Can you find ways to reduce the financial risks of international trade?
- Do you have people to advise you on the legal and tax implications of exporting?
- How will you deal with different monetary systems?
- Is your intellectual property protected?
- Do you have the resources to undertake market research? in international markets?
- How do you plan to enter export markets?
- Is your product or service viable in your target market?
- Who already uses your product or service? Is it in general use or limited to a particular group?
- Are there other significant demographic patterns to its use?
- Are there climatic or geographic factors that affect the use of your product or service?
- Are changes required to make it appeal to foreign customers?
- What’s its shelf life? Will this be reduced by time in transit?
- Is special documentation required? Does it need to meet any technical or regulatory requirements?
- How easily can it be transported?
- Would transportation costs make competitive pricing a problem?
- Does it require professional assembly or other technical skills?
- Is after-sales service needed? If so, is it available locally or do you have to provide it? Do you have the resources to do this?
- If you’re exporting services, what’s unique or special about them?
- Are your services considered to be world-class?
- Do you need to modify your services to allow for differences in language, culture and business environment?
- How do you plan to deliver your services: in person, with a local partner or electronically?
- Can you serve both your existing domestic customers and your new foreign clients?
- Will you be able to look after your export customers if domestic demand increases, or vice versa?
Innovation is about making positive change. It’s finding creative new ways to tackle problems, react to change or make something better. In business, this often means coming up with new or improved products or services that you can produce, license or sell. It also means developing business processes that reduce your costs and boost productivity. Investing wisely in innovation can improve your ability to compete in Canadian and world markets.
The road from developing and testing an original idea to introducing it in the marketplace can be long and costly. Remember that many great ideas never make it past the drawing board. Carefully evaluate your ideas and stick with those that offer the most promise and return on your investment.
Case study: Manitobah Mukluks
Courtesy of the Purdy Crawford Chair in Aboriginal Business Studies at Cape Breton University
In 2008, Sean McCormick, the owner of Manitobah Mukluks, had to decide whether to add a rubber outsole to the Aboriginal mukluks his firm manufactured. The change could expand his market and the rewards could be substantial if the mukluks were still considered Aboriginal and remained popular. However, if the change was not well received, his brand could be ruined.
To learn more about Sean’s situation and consider the steps you would take to address the issue, please see the Manitobah Mukluk’s case study.
Franchise your business
Franchising is one alternative for expanding a successful business. In a way, it’s like allowing others to copy your business for a fee. It allows you to expand your business with minimal investment capital compared to other business expansion models, since initial investment at the unit level is covered by the franchisee. You profit by getting a franchise fee and royalties, and the franchisee benefits by getting a proven business model.
The royalty on franchises ranges from 2 per cent on the gross sales revenue to 50 per cent of the net, depending on the nature of the business and your required degree of involvement. It’s not uncommon for you to expect from 3 per cent to 5 per cent of a franchisee’s revenues to be contributed to a cooperative advertising and promotion budget to promote the entire conceptual entity and corporate identity (product, logos, signage, etc.). In theory, the purchaser of your franchise package owns their own business, but in practice, the franchise contract removes any creative freedom from the operation of that business.
When you franchise your business, you set up a contractual relationship through a franchise agreement with the buyer that includes information on the key elements that are necessary to duplicate the success of your business in any number of new locations.
Some of the things you, as a franchiser, could offer in the franchise agreement include:
- a sub-lease on a location
- a complete package of leasehold improvements
- a furniture and fixtures assortment (all complete with logos and trademarks)
- a starting inventory package
- an initial training package
- an on-going support system comprised of accounting, promotion and general expertise in all aspects of the business management
Franchisers can often generate additional revenues by purchasing inventory and supplying stock to all the franchisees. A margin on the purchased stock or a service charge to the franchisees is quite common.
Form partnerships or buy another business
Have you considered joint venture opportunities that could grow your business? Instead of doing it all yourself, you can link up with a business or someone who complements what you do in order to grow your business. Partnerships or strategic alliances are ways to grow your business without investing a large portion of your own capital.
Buying or merging with an existing firm also offers opportunities to grow your business
Compared to starting a new business, some of the hard work has already been done for you. An existing business generally has its own markets with a customer base, production facilities, skilled workers and product or service lines you can blend or integrate with your own.
A strategic alliance allows you to grow your organization without necessarily expanding its size and incurring more costs. It also allows you to test the market for growth potential. Some benefits of joining up with another business include:
- extending your market reach
- increasing the scale of your production output
- getting better prices through bulk purchasing
- getting access to new technology
- accelerating research and development by sharing costs and resources
When you're looking for a potential partner, you should carefully assess the risks. Ask yourself the following questions:
- Does your partner have management buy-in or commitment from its board?
- Do you have a specific list of attributes that you're looking for: location, market reach, business culture?
- Have you ranked candidates with specific attributes in mind?
- Do you have the same objectives or goals as your partner? Have you established your expectations together?
- Will you be competing in the same market? Will this alliance affect your market position?
- Are your brands compatible? For example, a cost-focused company and high-end consumer business might not be an ideal pairing.
- Do you have a clear exit strategy?
- How long will the relationship last? Is it a one-time deal or long-term? Put everything in writing and be sure you have a systematic way of communicating.
- Do you have a strategic plan in mind that addresses the future of that alliance?
- Do you know what kind of contract you'll be signing? If there’s a contract, ensure that it’s governed by Canadian law. You’ll also need to define your terms of payment, which may vary in different countries.
Join forces to achieve economies of scale
By joining forces, partners can obtain better purchase prices from suppliers and lower their costs per item. As a company increases in size, costs per unit fall, resulting in lower prices or higher profits. An alliance could help your company negotiate better supply deals, share administrative costs such as advertising, and take advantage of costly technology and research and development.
Use a larger company’s distribution network
Making agreements with distributors can be a cost-effective strategy; not only do you save costs by forming strategic alliances, you can also rely on the distribution and marketing knowledge of your new partner. However, it’s crucial to assess risks such as performance, relationship structure and product training. Consider profiling potential distributors to ensure that they’re aligned with your needs and that your products don’t compete with theirs. Forming an alliance is much like recruiting a new employee – you’ll want someone who matches your company profile and represents you well.
Pass useful knowledge down the chain
You can also work closely with suppliers to develop new products, and share knowledge and training to improve your production process. For instance, you can coordinate your production schedule with theirs, reduce costs through size and timing of orders, and increase your range of products and services. Keep in mind that you’ll have to update your partner on any changes in new products and share forecasts to develop accurate sales plans.
A joint venture for on-site production
Another alliance strategy is to set up a joint venture where an on-site partner is responsible for production and the distribution of products in a specific area. In general, your partner would transfer knowledge and know-how and you would collect royalties in return. Your business benefits from your partner’s specific market expertise and gives you easier access to the market.
In the end, there are many other types of alliances you can consider, depending on your business needs. It’s important to select a strategy that will help you bring your business to a whole new level of growth.
Case study: Bearman Authentics
Courtesy of the Purdy Crawford Chair in Aboriginal Business Studies at Cape Breton University
After ten years in business, Clifford Paul, a Mi’kmaw craftsman from Membertou First Nation, was contemplating an expansion of his jewellery business. Clifford is a successful salesman whose business has experienced modest, incremental growth over the years. In January 2015 he had to determine the best strategy to grow Bearman AUTHENTICS in a manageable way, ensuring that any expansion would not take him away from his other priorities in life.
To learn more about Clifford’s situation and consider the steps you would take to grow your business, please see the Bearman Authentics case study.
Unless you’ve been able to generate substantial revenue from your existing business, you’ll likely need additional financial resources to help you expand your business. Speak to your financial advisor, business advisor or Economic Development Officer about your options for financing growth and where to find sources of financial support. You can also refer back to Chapter 3 for a discussion of business financing.
Aboriginal business directory
The Ontario government has developed an Aboriginal business directory to help businesses raise awareness of their products and services, and to connect Aboriginal businesses to industry, government and other businesses to encourage partnership development and Aboriginal procurement opportunities in Ontario. You can register your business or search for existing Aboriginal businesses by visiting the Aboriginal Business Directory.
The federal government maintains a similar directory of Aboriginal businesses, which can be accessed by visiting Industry Canada’s Canadian Company Capabilities directory.
When you’re ready to start thinking about retiring or leaving your business, you may want to consider who will be taking over the business from you. There are a number of things that should be considered when planning your departure from your business:
- When are you planning to leave the business?
- How long will you stay active in some of the business’ activities?
- How long will you be providing coaching or support to the new management team
The right person
- Is there someone in the business now who could take over the business from you? Does he or she want the opportunity? What kind of training will they need to get ready?
- If there’s someone in the business now who has expressed interest in taking it over, but you don’t think would make a good successor, think about how you’ll break the news that someone else will be taking charge.
- If you need to look outside the business to find your successor, where will you look?
- Will you sell the business to someone else?
- Make a list of all the actions that you perform in running your business that someone else will need to do, from the largest decisions to the smallest actions. Plan for the transfer of each of these activities.
- Who needs to know that someone else will be taking charge of your business? Introduce your successor to key customers, suppliers, banks and other people who are important to the business and would need to know.
Develop a succession plan for your business.
Selling your business
There are a number of reasons why people may sell a profitable business. You may decide that you want to change careers or spend more time with your family. Only you can know when the time is right to sell your business.
Selling a business can be difficult. You will need professional advisors to help you determine what your business is worth. They can also help you find potential buyers. You’ll also need a lawyer to help you with the legal change of ownership and a bank or financial institution can assist with financing for the new buyer.
To help you make the sale, you’ll need to tell the story of your business, why it has been successful and why it will continue to succeed even when you’re no longer part of it. You’ll need to provide your business’ financial information to the prospective buyer and develop a plan for the transfer of knowledge and responsibilities to the new owner.
It’s important to keep the lines of communication open with your employees, suppliers and customers about the future of your business. When you sell your business, you should speak with those you’re involved with and discuss the future of the business, answering any questions they may have.
As this chapter has shown, a business can undergo a number of transitions and these transitions can take many forms. Acknowledging how and in what ways you would like your business to develop may be a key feature in many of the business decisions you make. It’s also important to understand that your business will undergo some changes that originate from within and others that originate from outside your business. A changing environment in which a business operates will affect whether it is able to grow, develop, and succeed. Understanding the circumstances in which your business operates is just as important as understanding how it operates.
Where to find support and more information
Guide to Reviewing Your Business Performance
Once your business is established, you should take some time to evaluate how things are going. This may help you identify ways to grow your business. This guide provides step by step instructions on how to review the progress of your business.
Growing your business
- a guide on growth planning for your business
- provides links to online resources that can support your growth plan
- a guide to succession planning for your business, including how to identify a successor, determine the value of your business, and prepare for the transition