Many farmers and agribusiness owners want to grow their operations. Growth represents progress, and it can result in financial rewards and new opportunities for owners and employees. But with growth often comes a new set of challenges. This makes it critical to plan your growth initiatives carefully so that growth doesn’t lead to cash flow and other financial problems that can jeopardize your company’s future.
The first step in planning for business growth is to draft a strategic growth plan. This plan should detail not only the products, services and markets that will fuel your company’s growth, but also how growth will be financed. Growth financing can come from either owner’s equity that has been retained in the business or an outside source of funding.
Outside financing takes two different forms: debt and equity. Debt is simply a business loan, usually from a bank, that must be repaid over a set period of time. Several different types of bank loans can be used to support business growth, including term loans, commercial mortgages, construction loans, equipment leases and SBA loans.
Equity financing is another option, but it differs greatly from debt. In this case, you would sell a slice of ownership in your company to an outside investor (or investors) who would provide growth capital. Private equity firms and venture capitalists, including so-called angel investors, are the most common sources of equity financing.
There are pros and cons to both types of growth financing. A loan must be repaid with interest, and banks usually require borrowers to provide detailed financial information and pledge collateral to support the loan, possibly including the owner’s personal residence. On the other hand, equity doesn’t have to be repaid — investors expect to reap returns via their ownership stake in the business.
Put another way: Debt is more of a “pay me now” form of growth financing, while equity is more “pay me later.” You know what your cost of debt financing will be in terms of the interest rate and term of the loan. With equity, your investors will be compensated down the road if your growth initiatives are successful. Depending on how much equity you sell and how successful your company is in the future, equity could end up being much more expensive than debt in the long run.
Once you’ve decided how you will finance your growth initiative, you can start to plan out your company’s path to growth. Common business growth strategies include the following.
Creating and delivering new products and services
This is probably the most obvious growth strategy, but that doesn’t mean it’s easy. Conduct market research to determine not only which new products and services will appeal to your customers, but also which ones will be profitable.
Tapping into new markets and territories
The idea here is to market and sell your existing products and services to different customer niches or to customers in different geographic areas. Extensive market research is again one of the keys to success for this growth strategy.
Penetrating your existing markets
This strategy involves selling more of your existing products and services to your current customers. Start by performing a market segmentation analysis to determine which customers to target with marketing messages designed to increase specific product and service sales.
Developing new sales and delivery channels
The Internet is the best example of a new sales and delivery channel for products and services. Talk with your sales and marketing executives about ways you can use the Internet or another alternative channel to grow your sales and revenue.
A merger or acquisition (M&A) is another way to grow that’s very different from these organic growth strategies. This strategy can result in rapid growth literally overnight, as well as the realization of valuable synergies between the merged companies. Performing thorough due diligence on acquisition candidates is usually the key to a successful M&A.
It’s smart to seek outside expertise as you work on your growth plan. Your accountant should be able to offer objective advice and direction as you initiate and execute your strategic growth initiative. I would also recommend a profitability analysis of your proposed expansion be performed to help make sure that it will produce the financial results you expect. As always, feel free to contact me with questions.
Brian E. Ravencraft, CPA, CGMA is a Principal with Holbrook & Manter, CPAs. Brian has been with Holbrook & Manter since 1995, primarily focusing on the areas of Tax Consulting and Management Advisory Services within several firm service areas, focusing on agri-business and closely held businesses and their owners. Holbrook & Manter is a professional services firm founded in 1919 and we are unique in that we offer the resources of a large firm without compromising the focused and responsive personal attention that each client deserves. You can reach Brian through www.HolbrookManter.com or at BRavencraft@HolbrookManter.com.