To expand or not to expand, that's the question

Jayme Broudy covers the pros and cons of expanding your contracting business

Your business is doing OK, you've saved up a little cash, and a few competitors have dropped out because of the recession. There's an opportunity to expand your business and get positioned for the recovery, but it'll mean a serious investment. Should you do it?

I'd love to give you a simple yes or no on this one, but it isn't going to happen. Taking a business to the next level, in good times or bad, isn't a simple proposition.

But before you get all excited about expansion, figure out why you're doing it. There's a notion that bigger is always better and any business should grow whenever it can, but that's only true if a bigger business will help you achieve your long term goals. If you're comfortable where you are and can maintain your market position, there's little reason to wake the sleeping dog. If you're sure bigger is better for you, you can take the next steps.

A significant expansion in revenue means a substantial investment in infrastructure to support it. The systems, methods, and people that worked fine at $500K probably won’t handle $1 million. You can get by for a while by stretching things and doing patchwork fixes, but eventually you'll have to make a significant investment to upgrade everything. Once you complete the upgrade you'll be able to support another large increment of business into the future, and (if you’ve done it all properly) things will also get a lot easier to manage.

Things to ask yourself:

  • Why expand? Do you need the money? Would it freeze out key competition? Do you believe it will solve existing problems? Will it let you expand into areas you find particularly attractive? Would it just feel good?
  • Is the place running like a Swiss watch? If you're already working 50 or 60 hours a week and fighting fires, you haven't developed the standalone business structure that will accommodate serious growth. Expansion will only magnify existing problems and you'll have made a big investment that can't pay you back. Get your existing house in order first, meaning solid, documented processes, clear work standards, a solid team of employees who create results, etc. A standalone business can be scaled up, owner-dependent ones can't.
  • What's the payback period? Five years? Ten years? Does this fit with your exit strategy?
  • Do you really love the business? Taking on debt or a partner could lengthen your obligation to stay in the business. Do you like what you're doing enough to sign on for another 5 or 10 years?
  • Is it worth the hassle? Like opening up a wall for a "simple" repair, there's always more involved than you think in the beginning. That may be fine and worth it, just be clear about what you're signing up for and be prepared to take it on.
  • How risky is it? It's one thing to risk a year's profit and another to risk your life's work, solvency and credit. This is tied to the strength of your cash reserves, cash flow and the ability of the market to sustain you at the higher levels. Keep in mind that your cash outlays will probably occur long before you see incremental revenue. If the investment leverages you to the hilt with no room for error, you're playing with fire.
  • Have you done all your homework? Turn over as many rocks as possible, tumble the numbers every possible way, do your market research, confirm all costs and licenses/permits, etc. Run the project past a few trusted experts (your CPA, banker, etc.) and let them find the holes. Better now than later.

If all the ducks line up, you can choose to take the plunge. Break the investments into stages and do a piece at a time rather than tying up the entire amount up front. Give yourself leeway to pause if necessary, and begin setting up the new revenue that will use your new capacity when it comes on line.

A couple thoughts

  • Be prepared to say no: After all your analysis, you may find that the expansion just doesn’t make sense. Deciding against it will be hard and hugely disappointing, but it's far better to be disappointed now than bankrupt later.
  • Business partners: Although there are certainly exceptions, partners tend to be far more trouble than they're worth, particularly if you bring them into a business you've built yourself. Half of marriages end in divorce and business partnerships do so too, for many of the same reasons.

I'm all for growth for the right reasons, but you need to be honest with yourself about the reasons, risks, investments and rewards. Huge fortunes are made during economic downturns, and smart investments that improve productivity and snap up market share are a prime way to do it.

Jayme Broudy is the founder and principal of Contractor's Business School, a coaching, training and consulting firm, specializing in helping contractors produce more profit in less time. Since 1993, Jayme has worked with hundreds of contractors in many specialty areas to build successful stand-alone businesses. Visit www.contractorsbusinessschool.com or call 800.527.754.