Evolve or erode: How to grow your mid-size business

Mid-size businesses (MSBs) are a vital part of the New Zealand economy, providing hundreds of thousands of jobs and contributing significantly to our GDP. Yet our research report, The power and potential of the mid-size business, shows that there are some areas where our mid-market is underachieving and even stagnating.

By Matt Hannah.

The step from a MSB to a larger business is a sizeable one, and few MSBs are ready to make the leap. More typically, mid-sized businesses are on a treadmill of comfortable incomes but flat growth. Our data joins the dots to draw a picture of this type of MSB:

• A mature business with solid revenue.
• Modest profitability and productivity.
• Under-investment in R&D and innovation.
• Static income levels.
• An owner-manager who is highly involved in the business.
• A reluctance to take on more debt or ask for help; owners likely prefer to be independent and in control.
   

In many cases the owners of these businesses feel comfortable where they are right now. They are not keen to take on additional risk in the form of debt or investment to facilitate expansion. They are also not enthusiastic about giving up any control of their business. There appears to be a certain level of complacency in New Zealand MSBs that is preventing them from growing into large businesses.

These attitudes are understandable, and we certainly cannot expect every business owner to be constantly aspiring to grow. There’s nothing wrong with enjoying a comfortable position in life and business, particularly if you are close to retirement.

However, everything in life has its risks, and that includes doing nothing. Complacency carries a serious risk of business retraction. Change is happening at record speed in the modern economy; you need to embrace disruption simply to keep up with your competitors. Failing to evolve means your business model will likely become redundant and the value of your company will gradually erode over the years.

The right advice to drive growth

If you’re motivated to increase the value of your business in the long term, the first step is being ready to accept advice and new ideas.  You need to be open to innovation and disruption, which means being challenged on what you’re currently doing. It’s not going be comfortable or easy – it’s going to require a willingness to listen. You need a diverse team of people around you who will ask the difficult questions, rather than simply agreeing with management because it’s the path of least resistance.

Engaging professional advisors and specialists provides an independent perspective on the business from a range of different lenses. One option to engage specific expertise is to establish an advisory board. An advisory board’s role is to provide advice to the directors and management, without having the formal authority to govern. It has no powers of veto, instruction or direction – either actual or implied. That means the advisory board can exercise its best judgement and offer advice in good faith, without the same responsibility as a constitutional board.

An advisory board should bring in the skills and experience that are required in your business; it also provides additional flexibility to substitute board members on a more regular basis to meet the current business needs. That might be industry-specific expertise, or skill-based expertise like finance, IT, marketing or HR. You need a diverse range of people with myriad experience – packing a board with yes-men adds little to the decision-making process. By including external professionals such as your accountant or lawyer, you can get the benefit of their experience working with businesses who have similar challenges and opportunities.

It’s easy for a business to fall into the groupthink trap; independent advice helps you avoid this by identifying risks you haven’t spotted, and to develop solutions that might not have occurred to you.

Direction and distance

Opening up your perspective means you can consider new ideas and let go of the day-to-day tasks of running your business.  To grow your company, you need to step back from the minutiae of filling orders or talking to new clients. And no matter how well you know your business, you can’t possibly be good at everything: marketing, finance, sales, HR, customer service and IT. You need to stop doing the jobs that you’re not particularly good at or value adding.

Instead, you should stand back and be more analytical. Where is the business going? What will it look like in five years? What’s your exit strategy? Where can your specific expertise be best applied? I’ve found a surprising number of business owners can’t really answer those questions. They’re often stretched too thin trying to do everything, despite not having the skills to do it all well. Engaging an advisor to help implement strategic changes reduces stress levels and frees up time for owners to really concentrate on building a stronger, more valuable organisation.

The right advisors will provide a sounding board for your analysis, while assisting to set a strategic direction for the business. It means seeing beyond what’s happening today and talking through long-term decisions that will shape the future of the company.

Risk and reward go hand in hand

Investing in your business increases your financial exposure but it also increases your potential for improved returns. If your company is well-established, it should be able to withstand some knocks along the way toward growth. For many owners the business is their largest asset and you can maximise its value

As the owner of a stagnating MSB, you can own 100% of a business worth $5 million. Invest cleverly, borrow when you need to, get the right people on board and you can grow it into a large business. Then you might own 50% of a business worth $20 million.

Open your mind, build an advisory board of people who will challenge you, and your business could successfully make that leap from mid-sized to major player. A solid first step is to talk to a business advisor who can help you navigate some of the challenges and support you in driving profitable growth.

Matt Hannah (pictured) is partner, Business Advisory Services, at Grant Thornton New Zealand.