The previous article described how Scott, the co-owner of a small, successful compressor business, was pondering his options. His brother John decided to step away from the company to protect his health. Scott created a list of reasons why he was willing, even eager, to pursue a business growth strategy that would get the company out of No Man’s Land and give it a shot at taking off to become a much larger firm.
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Business Growth Challenges Defined: You May Be In No Man's Land.
Now Scott to considered the reasons why the company should remain its current size. He could also hear his brother’s familiar objections to an aggressive business growth strategy ringing in his ears. He started to write them down:
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Growing would require additional capital for new equipment, expanded warehousing, and more inventory
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These investments couldn’t be funded out of operations without cutting their cash distributions.
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If he added outside capital should he borrow from the bank, or consider adding new equity investors?
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How would he find investors and how would they change the way he wanted to run the business?
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Could he develop and maintain the additional customers that growth required? How thin would he have to stretch himself to double the company? Could he manage the growth and improvements in operations, while also adding more and more customers?
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Some members of the management team had also argued against business growth. Scott sometimes wondered if they secretly doubted that they had the skills needed to manage a larger, more complex business. What if they were right? Did he really want to let some of his most trusted employees go and hire a group of strangers?
Private Equity
Scott thought about the option to take on investment by a private equity firm, a common strategy for a company that needs to raise capital and survive No Man’s Land. A PE firm would pump capital into the firm and create a 3-7 year business growth strategy to expand the company and increase its valuation significantly. He had spoken with a number of middle market private equity firms and was familiar with the kind of deal they would offer him. They would capitalize the firm for growth and provide the financial flexibility required to see it through the fits and starts that could be expected during a process of rapid growth. He had heard their argument that unlike banks, PE firms are good partners for entrepreneurs. He could expect PE to pay him and his brother something for the business now and give them a shot at building real wealth with a minority stake going forward; a smaller share of a larger pie.
He also knew the arguments against private equity. He would give up control and down the road could be fired from the company his family had built. He’d heard the stories about CEOs spending hours away from the business, providing the PE firm with all kinds of operating reports. He had read that an entrepreneur who had sold to a large private equity had become disenchanted because he found himself “reporting to a 25 year old who in turn reports to a 32 year old.”
It had been so easy to argue for business growth when John and the others pushed back. But now that he was in control, the decision wasn’t so obvious.
Scott knew that 28 employees and their families were counting on him; how could he be sure that he was doing the right thing?
Have you experience similar business growth challenges? Share your thoughts with us below, and don't forget to download our free guide "Business Growth Challenges Defined: You May Be In No Man's Land."
This post was originally published in August, 2012 and has been updated. We believe it remains relevant to the challenges that our blog readers face.
