Avoid new ventures/diversify

“Let’s diversify – it’ll make us more attractive to a buyer”

It is a suggestion I have heard many times.

However, in my experience, pricing power comes with being in a niche market. In particular the right pricing strategies can be used to maximise margins. This is not an easy task.

So, some business owners concentrate on developing other sectors. It is an easier option. However, if these go wrong, they can be detrimental to the business. It can detract from the core business. Moreover, without accurate costing and accountancy it may not be possible to identify where cash and profits are being generated itself and so there is no clear picture of the two activities.

There is though the four fundamental ways of growing a business. These are;

• Increase the number of customers within your niche market.
• Increase the transaction frequency.
• Increase the transaction value or “average sale”
• Increase the effectiveness of each process in your business.

There is no mention of new ventures or diversification.

Moreover, in their book, In Search of Excellence, Tom Peters and Robert Waterman identify the essentials that make companies excellent. “Sticking to the knitting,” high service levels, people-focused, pride of product were the items they identified. There is some luck here where there are growing markets. Where this is the case, following market trends and adapting your services are a cleaner way of marketing the business.

When the sales process begins, there should be a clear picture of what is for sale, its profits and cash generation. Different people understand different businesses. the important thing when you come to sell your business is to understand the sector you are in. I have seen some owners start new ventures, only to fail and the effects of these trammel the sales process and overall picture of the business, its profits and cash generation. The problems arise where the managers are less successful managing in markets they neither know well nor understand.

The whole thing looks messy to a buyer especially if it goes wrong.

So, where possible, stay in your sector niche, have a simple balance sheet and a pure profit and loss with plenty of cash generation.

Business owners will understandably be focused on the immediate issues of survival and growth. I appreciate in these testing times (2022) with so much fundamental uncertainty there is a great attraction in finding new markets.

There is a case I know where an electrical distributor lost something in the region of 90% of the turnover at the start of the pandemic. Staff were furloughed. There was a strong balance sheet but the cash reserves would not last for ever. The owner, a true entrepreneur, decided to buy in bulk alcoholic hand wash. It was bought in large containers and decanted into the smaller ones we see about today. This kept the cash flow positive and so the business survived. At the time it made perfect sense. The core business continues and has not been prejudiced.

I have spoken recently to some buyers. Even today, they say they are interested in those businesses that are just being exceptionally good in their niche.

Some buyers are focused more on strategy than growth. So, they look at a potential business acquisition from a perspective of what new products fit where their weaknesses are to be found. In other words, they look at the four fundaments of growing a business.

If your business is going to be acquired by another business for its speciality, then that is a distinct perspective to pure growth.

Today it tends to make more sense to buy a business that has some momentum – say profits above £300,000 run by a management team. If your business is not already there it will take time to achieve these milestones with the consequent risks involved.

If you are planning an exit in the near future, you need to decide whether it is worth making that step and chasing that growth or sticking with what you are doing in a niche and becoming the best at it.

As you will read elsewhere in my blogs, it is no good waking up one morning and deciding you want to sell. There has to be a plan to put the business in a saleable position then you can decide whether or not it could be sold.

Take two business…both have turnover of £1mn and profits of £200k.

Business A

• Owner dominates sales, operations, monetary management…
• Old working practices
• Old equipment prone to breakdowns
• No social media, PR or high-ranking website

Business B

• Well-functioning management teams in the core area
• Latest thinking for efficiencies
• Continual investment in machinery
• Regularly features in trade press, award winners…

Which one would you rather buy?

I engage in both selling and buying businesses, so I see it from both sides. There is no right answer. Consider the question: “Growth versus Niche?” You really cannot answer the question until you have a good idea of who your buyer is likely to be.

There is talk about creating competitive tension, which is having more than one offer for your business. In my experience this may happen and having an idea of who your buyer might be could serve you well. There is no need to discuss your business with them. No, look at their operations, where might there be opportunities and or weaknesses? Could your business position itself to help in those opportunities or mitigate the weaknesses… the four fundamentals.

Now we are out of the restrictions more trade shows are happening, take time to visit these. Have a look at your competitors and see where your chances might lie.

Moreover, how would your business culture and team fit in with theirs? It is not just about the numbers. How much integration will need to take place? More of this later in other blogs.

Again, take two business both have turnover of £1mn but one has profits of £100k while the other £300k

What do you think?

Diversify or concentrate?

I would be interested to hear your views.