How to Decide Whether to Maintain Your Business or Expand It

by Diane M. Calabrese |Published January 2024

Decision-making is difficult. That is not debatable. Should you buy a house, sell a house, or enlarge a house?

Should you buy a new car or a refurbished car?

There’s no foolproof secret about how to make the optimal decision about anything. Pros and cons must be weighed. No venture in life is risk free, not one.

Thus, suppose a business has good cash flow, provides a steady income for its owner, and shows stability in all the measures used to evaluate strength. Should an owner just keep doing what he or she is doing, or should the owner consider expanding? Perhaps adding a new region, service, or product will make the business stronger still.

And are there downturns in the economy that might be better met by more diversity in a company’s offerings? What to do?

Back up and think business philosophy. Each owner is unique with a one-of-a-kind philosophy about business. Yet there are some common strategies: grow, grow enough to reach a stable equilibrium, grow enough to sell the business and start another, etc.

“We have always been a growth-driven company,” says Curtis Braber, owner of BE Power Equipment in Abbotsford, BC. “We feel that the key is to diversify products and vertically integrate components to stay competitive and offer value to our dealers.”

Vertical integration is in itself an expansion approach. Instead of relying on suppliers for parts, a company makes those manufacturers part of its business. Such integration at large companies may extend to owning the sources of raw materials that go into components.

Braber tells us something about his company’s approach to vertical integration. “In 2018 we purchased America’s largest parts distribution company, Barens Inc.” The purchase of the parts distribution firm allowed Braber’s company to expand its parts offerings to dealers.

“In 2022 we purchased GCA Largo manufacturing in Nashville to widen our offerings of hot water washers and high-quality coil production,” says Braber. “We have rarely pulled back from growth opportunities.”

In fact, the list of acquisitions continues to get longer. “We recently purchased our third manufacturing company in Australia, Pulse Manufacturing, a sewer-jetter manufacturer, which is managed by BAR Group Australia—another Australian-based pressure washer manufacturer we have ownership in,” says Braber.

Practicing both horizontal and vertical integration is a way many companies grow larger. The decision of whether to acquire a competitor (horizontal) or a supplier (vertical) requires serious evaluation of the prospective acquisition.

For instance, a company may be a great complement to an existing business, but if it’s in financial ill health that might be a dealbreaker. It is “might be” because the buyer may see an immediate fix to stabilize a faltering company. In that case, the acquisition could be a bargain to buy and a boon to the purchaser.

No one buys a company without due diligence. The similarity with purchasing a house is obvious. We all read accounts of individuals who bought homes from people who had stolen titles to the homes. How did it happen? Because the purchaser failed to carry out his or her  due diligence.

The U.S. Small Business Administration (SBA.gov) provides primers on business expansion. Merge and acquire businesses is one of them. It reminds a would-be buyer that merging or acquiring a business is much like starting a business, but with a few extra steps.

The extra steps protect the owner’s existing business. First on the list is determining the valuation of the company that might be purchased. Never rely on the valuation presented by the company that is for sale. A third-party appraiser may be the best choice.

Why not use in-house staff to evaluate a potential acquisition? If an in-house appraiser is keen for the deal to proceed, he or she might unintentionally minimize red flags. It’s no different from the way many of us have talked ourselves into a house purchase that perhaps was not calamitous, but still ignored several updates (and expenses) revealed to be required in short order post-purchase.

Acquisitions include measures of both enthusiasm and prudence. And prudence should take precedence.

Readiness

“We decided to expand back in 2018 and to acquire companies that could fit into our growth plan, taking into consideration product alignment that works within our core competence,” says Gus Alexander, CEO of FNA Group in Pleasant Prairie, WI. And the expansion has been great.

“We have acquired four businesses in the last few years,” explains Alexander. “As a result, we have increased our brand awareness coupled with an increase in our revenue and bottom line.”

Alexander emphasizes that acquisition represents only one part of a multi-part strategy to grow. “In addition, we looked to innovation of our existing product line to increase our value and drive revenue as well.”

Returning to the business strategy, plan, or outlook (philosophy), which all roll into one another, Alexander reminds us that the starting point—that the vision is integral to the company—cannot be left behind as a company grows. “The key or most important factor for expanding a business generally revolves around market fit.”

Alexader explains the fit requires ensuring the alignment of products or services with customer needs and demands in the company’s target markets. “This includes understanding customer preferences, identifying gaps that our offerings can fit, and continuously improving our value proposition.”

Determining the market fit comes first. But many factors “beyond market fit” must be considered, says Alexander. And he lists seven.

Strong customer relationships, a scalable business model, financial health and investment, a talented workforce, competitive advantage, adaptability and innovation, and effective marketing and sales strategy must be weighed, says Alexander. For instance, with strong customer relationships in place, a new venture by a company immediately attracts interest.

A new product from a company known to and appreciated by its customer base draws immediate attention. As such, it will have a built-in constituency to convey positive word-of-mouth referrals.

And about the scalable business model? “It allows for growth without proportionally increasing cost,” says Alexander. “This might involve automation, streamlining processes, or using technology to scale.”

What about financial health? It must be present, demonstrated by sufficient funds or access to them, if expansion is to occur, explains Alexander. There’s the capital required for the acquisition itself, as well as marketing, hiring, and product development.

Let’s consider one more: adaptability and innovation. “Rapidly adapting to changing trends and continuously improving our products or services will keep our business relevant as we continue down our growth path,” says Alexander.

Skilled employees (talented workforce), a clearly differentiated product or service (competitive advantage), and ways to reach new customers (effective marketing and sales strategy) round out the seven, explains Alexander. They undergird and propel the expansion from concept to reality.

Among the skilled employees will be those who have responsibility for ascertaining that no hoops are missed. Going back to the SBA for reminders, we find a good summary of the many must-dos when entering a new market.

Legal requirements must be met. Licenses and permits may be needed, especially with a move into a new region or novel product. There may also be zoning restrictions that have to be considered before a physical expansion of an existing company. And don’t forget taxes.

The number of logistic concerns tied to an expansion varies. Preparation, not trepidation, is the way to meet and work across such concerns.

Reality Check

Just as most of us will one day have home-buying experiences to recall, so business owners have experience with the maintain-or-expand decision-making process. (And it’s a good idea to talk to colleagues about their experiences when chatting informally at professional society or business meetings.)

“I have been there and done that,” says Roy Pennington, owner of Hi Pressure Cleaning Systems Inc. in Houma, LA. “I expanded my manageable two stores 60 miles apart to branch out to a location in Mobile, Alabama, when a competitor ‘abandoned’ that market.”

Pennington says he went to Mobile and located the former manager of the company and “made him a management/ownership offer he could not refuse.” That offer was “33 percent ownership at no cost after one year.”

How did it go? “It worked for three years until for various reasons he along with another one-third owner felt they could do a better job of running the store without me,” explains Pennington. “So, I got voted out of management and control status.”

The arrangement did not end well, says Pennington. “That store ‘failed’ and closed within six to eight months of my no longer having any involvement in its operations.”

But business owners are optimists by nature. And when a new opportunity emerges, it kindles interest and excitement.

That’s the point at which Pennington gives us a reality check. “I wanted to branch out to another location in Jackson, Mississippi. Upon hearing my intentions, my CPA sat me down and explained that I was doing a great job and making money; and at some point I would have to realize that these growth plans would only entail my making jobs for other people.”

The CPA’s caution is an important one. How close to the operation of a business does the owner want to be? The larger a business becomes, the more helping hands at the management level are needed.

Does the owner want to manage the managers or be intimately involved with the products or services? This is a crucial part of an owner’s perspective that must be understood by the owner, who is the ultimate decision maker.

“I had seen previous ‘company stores’ get sold by national manufacturers, and in talking with the subsequent owners, I quickly learned that now the locations were being micromanaged by an on-site owner,” explains Pennington. It gave him a fresh perspective.

“Amazingly it became apparent that inventory levels could be dramatically reduced, and we no longer needed 10 company vehicles,” says Pennington. “You pretty much have got to be hands-on to see what is happening. Experts from afar are no substitute.”

Maintaining a successful business—being part of the day-to-day processes and comings and goings—suits many business owners. Sometimes, as Pennington explains, they simply must try a different structure to find out they are most happy with the one they already had.

We could go back to the house analogy. Many people miss a house so much they try to buy it back.

But Pennington gives us a better analogy for an owner appreciating what works best for him or her. “I have remembered the old baseball sage, that ‘too many times a hitter who has a stand-up triple gets tagged out at home plate by trying to stretch the triple to the home run.”