Entrepreneur Insight

Watch Out for Slipups When Expanding Your Business

Being prepared can help entrepreneurs avoid headaches and setbacks to expansion.

Determining how much debt a business can accrue, when to hire additional employees and being psychologically prepared are all key factors when owners decide to expand their business. For 14 years, Bradley Zall oversaw the company he founded, Accurate Chemical, a Tempe, Ariz.-based company serving the hospitality industry by manufacturing and distributing their own soaps, detergents and sanitation products. The growth was largely organic, but the company was profitable.

A couple of years ago, opportunities to purchase five companies cropped up, and Zall took a chance to expand his southwest footprint from Phoenix to Southern California, Colorado, and Las Vegas, hiring a total of 60 employees.

Zall, who serves as president, also needed to have capital ready since his industry requires that he also purchase expensive industrial dishwashers for the restaurants they service ahead of time in order for Accurate Chemical to lease it to the owners.

Expanding quickly was a daunting experience, but Zall says the stress and headaches of the acquisitions have been worth it.

“I had proven myself to the bank, since my projections from expenses to the revenue generated were right,” he says. “Once you have opened in a new market, you need to have the capital ready. For me to service a chain of six restaurants, I need $60,000 to procure the business, since each dishwashing machine is $5,000 on average.”

Being prepared financially

Many small business owners are driven by their feelings when they have an opportunity to grow their business, shares Jose Juan Vega, first vice president and manager of small business development at East West Bank. This belief leads them to pursue an expansion without being prepared for the amount of overhead they will need. “They are not really accounting for all the costs and the time it takes to collect on their accounts receivables,” he says.

One former client had a contract with a regional supermarket chain and needed enough capital to increase their current levels of inventory. After five years, the supermarket chain decided to expand and asked the business owner to provide enough inventory for four new stores.

“It was a substantial investment, and he was in so much debt already,” Vega says. Adding more debt meant his liabilities were too high. After being turned down by the bank for a loan, the business owner realized he needed to add more equity to his company.

“If he added more debt, he would have diluted his business, and this was not the right strategy,” Vega says. “You don’t want to owe more than what the company is worth.”

After working with a Small Business Administration (SBA) consultant, this businessman chose a different strategy by adding a partner who brought equity. He was able to expand without accruing more debt and operates a successful business today.

Entrepreneurs should take advantage of the free resources offered by the Small Business Administration. It provides business consultants who can help owners revise their current strategy to grow before they seek a loan from a bank. The consultants can also advise owners if their budget and projections for sales proposals are on target or too optimistic. Choosing a banker early on who specializes in SBA loans can also help smooth the process.

(Photo credit): Gettyimages.com/Hero Images

"Too often business owners are concerned with the daily operations of their industry and do not devote the time to develop a plan for additional growth."

- Jose Vega

Mental preparedness is important

“Too often business owners are concerned with the daily operations of their industry and do not devote the time to develop a plan for additional growth,” Vega says.

Successful owners need to be open to new ideas and technology, which can help their companies operate better or more easily. Setting aside capital to open another location or to purchase new equipment is also crucial.

When a Californian sheet metal business run by three brothers wanted to beat their competitors, they decided to purchase a $1 million laser cutter. The decision to take on additional debt proved to be fruitful, as the company’s revenue grew from $1.5 million to over $6 million in just three years. “The new machine allowed them to provide a lot more than the typical shop,” Vega says.

Even during downturns, entrepreneurs who have a good business plan can be profitable.

A printing shop in 2008 decided to expand their overhead just as everyone else lowered their expenses. By purchasing a new printer, the shop was able to produce business cards and marketing materials within 30 minutes for their customers. “This proved to be the solution,” Vega adds. “They were able to grow their business and bought their building three years later in 2011.”

This local business was able to generate profit because they had a vision, their budget was well done and they were approved for a loan to purchase the additional equipment, Vega says. “They thought carefully about how to afford all the expenses.”

Having realistic growth expectations is critical, Zall agrees. “You can shoot for the moon and stars, but when your projections are not farfetched, you will get the financing,” he says. “You need to paint the picture for the lenders who want to know where you are going to be in a few months, and next year, and what your plan is if there is turbulence like a recession.”

Entrepreneurs who are constantly developing new plans and goals can handle the stress from clients and employees more easily, says Zall.

Being able to pivot by scaling back if needed is also important.

“Each morning while exercising, I listen to a podcast that is thought-provoking,” Zall says. “It helps me put on my ‘armor’ so that I can seize the day and react favorably to the daily stressors.” Developing a contingency plan is also crucial to avoiding the problems, which develop during times of growth, he adds.

“I borrowed a lot of money and, when you grow, the fear comes in,” Zall says. “It started to dictate the decisions I was making even though I knew the moves I was making were right, especially about spending money on equipment and personnel. A lack of money does not stop me from having dreams and aspirations.”

When to hire more employees

During his merger and acquisition period, Zall hired 56 employees within a 26-month period. Although the experience was nerve-racking, he could not afford to wait since the success of his business relies partly on his service technicians being able to repair commercial dishwashers 24 hours a day.

Although he had to budget for a large payroll without any initial revenue, Zall’s strategy is to always have extra employees available, especially since he was expanding into new markets.

“In the service business, I’m always overemployed,” he says. “I don’t want to get the business and not be able to fulfill the promise.” Waiting to hire additional workers meant Zall would be taking on additional risk, such as technicians obtaining jobs with a competitor. “I had to do it fast since I had all this talent,” he said.

Zall advises other owners that the number of employees you hire is a “fine line because you can starve yourself,” he says.

When companies are expanding, they can attract employees to work for them by creating job descriptions for each position to clarify specific expectations, says George Atiee, vice president of Robert Half Finance and Accounting, North America, a Menlo Park, Calif.-based staffing company.

“Benchmark duties and wages against similar jobs from other companies in your area,” he says. “The job title is important, but the duties and expectations should drive the salary.” With low unemployment rates, potential employees have more options and hiring can be more challenging.

“In this highly competitive hiring market, hiring the right person quickly is king,” says Atiee. “Create a well-defined hiring process that includes who has to be involved with each hire, and make sure, if possible, to have alternate interviewers available to interview candidates. This can help expedite making a decision and extending an offer to the final candidate.”

Receiving help while recruiting employees can speed up the process.

“Build your talent base, but don’t try to do it alone,” he says. “Consider consulting with a specialized recruiting firm that can help small and mid-sized companies as they grow and compete with the extensive resources of larger companies. Having the right recruitment tools and strategies in place can help you build a strong, dynamic team that you’ll need to succeed.”