Even if you are perfectly happy with the current size of your business today, there will come a time when you will want to be able to demonstrate it has growth potential.
Why? Because if you ever plan to one day sell your business, or transition it to family or key employees, they’re going to want to know the answer to that question. Your answer will impact the value of the business.
Often conversations with business owners about growth potential go something like this.
Q: “What kind of growth is your business capable of achieving in the next five years?”
A: “We think we can grow our market share and increase sales every year.”
What does that mean? It’s possibly an accurate answer, but it doesn’t really tell you anything. “We think we can grow…” Who doesn’t want that? It is great that they think they can increase sales, but what about margins? A little or a lot? How prepared is the business to handle growth?
Growth potential is an important part of your business. It gets to the long-term health and potential of what you’re building. Here’s a more specific and productive way to think about growth potential for your company.
Want to Test Your Company’s Growth Potential?
Here are four basic questions you may want to ask yourself:
Is the demand for your product or service declining, growing with the economy or growing faster than the economy?
You want the demand to at least be growing with the economy. Less than that, and you will have a hard time validating any projections for growth potential.
If overnight you had five times as many customers wanting to buy your product or service, how hard would it be to deliver?
This is all about systems, processes and scalability—probably the biggest areas for breakdowns in a growing business. The opportunities for improvement are usually abundant in most businesses, so don’t feel bad if this one makes you nervous.
If you wanted to replicate your business in another state or region, how hard would it be to do that?
This not only speaks to scalability, but also challenges if the business is only viable in a certain type of environment.
When you add new customers, do your profit margins typically go up, down or stay the same?
Some businesses struggle to maintain margins as they add more customers. Or when current customers spend more, the businesses reduce their margins. If not properly managed, this can have a negative effect on the company’s bottom line. Best case: The healthiest kind of growth is where the more you grow, the better your margins are. A lot of that has to do with your industry and business model, but if you can get there, it’s a great place to be.
Now ask yourself, “Based on the above answers, if I wanted to buy my company, would I be likely to view it more or less favorably in terms of having growth potential?” If the answer is more favorably, congratulations! Keep up the great work.
If you are unsure or not overly excited about your answers, you may want to dig a little deeper and see how you might better position yourself for growth.