How (and why) to Identify Opportunities for Growth!
Does size matter and is growth important? In this blog and linked webinar I’ll take a look at both these questions and then take you through a simple but effective framework for identifying opportunities for growth with the highest potential and least risk.
- Understand the impact on size and growth on the potential value of your business
- Learn how to apply a simple framework to identify opportunities and classify them according to potential and risk
To listen to Kevin delivering a webinar on this topic
You can also see his SlideShare here
We’ve all heard quotes about how you have to grow – Essentially the idea being that if you stand still, others don’t so you will end up going backwards
I don’t disagree with that – but also growth (and size) directly impact on the value of your businesss
To illustrate that….
When he was putting his book ‘Built to Sell’ together, John Warrillow conducted research amongst 14,000 businesses who had either sold or received an offer.
He found a number of key drivers of value – and one of those is growth – both past and future potential
He found that the average business will get offers in the order of 3.7/ 3.8 times net profits – but if we look at the ability to accommodate 5 x demand then the multiple varied depending on how easy it would be.
Imagine a firm of lawyers trying to take on 5 times as many cases – they’d need to hire 5 times as many lawyers – very difficult to scale rapidly to 5x / almost impossible
Businesses like this typically would receive a lower multiple
There is a similar correlation with size – so growth and size together have a significant impact on value
But if we look at say a software firm that easily cope with additional users, they are more likely to receive a much higher multiple.
The reason size and ability to grow have such an impact on value comes back to what a buyer is looking for when he buys your business
A buyer is buying your future stream of profits
And he (or she) is wanting to know
- How much profit will your business generate in the future?
- How reliable are these estimates?
In the webinar I illustrate the impact with some numbers – using firstly a business that we are confident will deliver £100k per year in net profits for the next 10 years and secondly a businesses that we are confident will deliver £100k in the first year and then grow at 20% per year.
Financial buyer will look at the rights to the future stream of profits and decide what they are willing to pay TODAY for those rights. This is called Net Present Value.
Both business have been able to make the case that their projections are reliable but the second is a rapidly growing business whereas the 1st is stable at £100k pre-tax profit. Both are equally believable so the buyer will apply the same discount rate to both – we used 15% in this example.
The effect is that the first is worth around £500k whereas the second 2.5 times that – or just short of £1.3M
So we know that size and growth are important when it comes to the value of our business.
In a moment we are going to look at a framework to help brainstorm how you can grow your business with the highest opportunity and the lowest risk
I’m going to walk you through the Ansoff Matrix – invented by the mathematician Igor Ansoff & published in the Harvard Business Review in 1959 – so it’s not new – but it is extremely useful and simple to understand
It looks at your business from the standpoint of what markets/ customer groups you are in today – Existing Markets
And what potential markets you might enter – or New Markets
And then on the horizontal axis it looks at product and service lines – that you currently offer – Existing Products/ Services
And ones you might think about offering in the future – or New Products and services
And this enables us to bring risk into our thinking because what the Ansoff Matrix tells us is that the markets we are in today with our existing products and services represent the lowest risk of failure
So essentially re-doubling your efforts with your existing customer groups and product mix is the lowest risk option for growth – and therefore where we should start looking.
Next we are going to look at entering new markets/ customer groups with our existing products and services – but know that this is going to be more risky than the first
Not surprisingly – new markets we don’t know as well so there will be things we might not be aware of and it will probably be harder to succeed
Similarly an equally risky proposition is to stay in your existing markets and create new products or services
And the most risky proposition is where we are going into new markets with new products and services
So as you think about your business and growing it in the lowest risk fashion we are going to focus first on existing markets/ products services, then on to the new and existing orange bubbles, and last of all we may entertain the idea of new new or red bubble!
In the webinar I illustrate this by looking at a really simple business and one I did with my brother when we were growing up – and thinking about it in the context of the Ansoff Matrix
That of selling apples that grew on our trees at home to people who went passed our driveway.
If you want to apply this thinking to your business you can start by:
- Making a list of up to 5 existing products or services that you could sell more of by focusing extra energy on your existing customers
- Next make a list of up to 5 new markets that you could enter with your existing set of products or services – remember markets doesn’t just mean new geographic markets
- And lastly
- Now make a list of up to 5 new products or services that you do not currently offer
- State whether to existing or new markets
And plot them on an Ansoff Matrix for further discussion/ working up
So…We should now understand that growth (and size) really does matter
And we’ve got a framework for helping us to identify opportunities with the greatest potential and lowest risk of failure
Of course this is not the whole story – next time we’ll take a look at assessing and working up these opportunities further to make sure we are prioritising our efforts on opportunities with the greatest chance of success
To listen to Kevin delivering a webinar on this topic
BizSmart helps business owners of small and medium sized businesses to create value and scale their businesses through sound practical business support by providing- Insight, Clarity and business support with a real determination to help you succeed. You can access blogs like this and more besides through our free SmartRoom service here