Practical tips for growing small businesses into middle-market businesses

07/20/2014 7:00 PM

07/24/2014 1:35 PM

It’s a common question for small-business owners: “How can I take my company to the next level and become a middle-market business?” Although at Cassel Salpeter we focus on working with middle-market businesses, I often run into small-business owners in the community who ask for some practical tips based on my experience helping bigger companies.

Before answering this question, it’s important to understand the definition of the middle market, which varies according to whom you ask. I define the middle market as any business with $10 million to $250 million in enterprise value. Although there are more than 27 million businesses in the United States according to the last census, only about 300,000 have more than $5 million in revenues. So, becoming a middle-market business clearly is not easy. However, in many cases it may be attained with hard work and the right strategy (and a little luck does not hurt).

No matter how you position your business for growth into the middle market, you will have to prepare your business strategy.

First, evaluate the size of the market for your product or service and your position within the market. Is it saturated with competitors? Is it a stagnant market or are there growth prospects? Are you in a unique position to capitalize on growth opportunities? There’s more than one way to expand: you can expand organically by opening additional locations or by buying a competitor or similar business in your current market or a new market. You might market or advertise more or hire additional sales people.

When looking to grow, find out if there’s room for innovation with your products or services. Do you make standard nuts and bolts with little room for improvement, or can you innovate and expand your product line? It’s always great to survey your current and potential customers or clients and determine what would most interest them.

Furthermore, do you have adequate capital for growth? Again, you have multiple options. You can pursue a Small Business Administration loan or identify a Small Business Investment Company to provide a loan or invest in your organization. Alternatively, you can decrease your distributions and instead retain earnings to build up your equity base. You might get additional vendor financing. For the right plan, capital should be available.

Sometimes a simple policy change can help. Take inventory of your current policies and determine if they are aiding or impeding your growth. For example, online retailer Zappos instituted a 365-day return policy, a sharp departure from the then industry standard of 30 days. Zappos figured out that customers would feel more comfortable buying more items knowing they could return them without hassles. Although counter intuitive, its return rates actually dropped. This helped propel Zappos toward explosive growth.

Next, you’ll need to evaluate your distribution model and channels. Generally, the more distribution channels you have, the more opportunities you will have to move product. Before the advent of online shopping and commerce, brick and mortar stores were the primary means for purchasing goods along with catalogs. Remember the Sears catalog? Catalogs and mail order shopping expanded in popularity over time, vastly expanding the reach of businesses like Victoria’s Secret and other consumer and apparel outlets. But now there are a wide variety of multichannel distribution options, such as the Internet, web stores and email marketing, and so forth. Potential consumers search for items, they receive emails and notifications about new products and specials, they walk past storefronts, and their friends share content about brands on social media channels. To maximize growth, make sure you are present and easily accessible wherever your customers and referral sources are, and keep a close pulse on which channels are working best for you and why.

Growing your business also means hiring and retaining the right talent. Turnover is costly; pay good people fairly and incentivize them to stay. Take a look at your company benefits such as health care, 401k, and make sure you’re offering a competitive package that will lure and retain the talent you need to grow. Look at your corporate culture.

Finally, a primary external factor you will contend with is the economy. In a growing economy, retailers grow; in a slowing economy, those same retailers shrink. Ensure you have the capital and systems to weather a downturn so you can capitalize on the peaks. You must look at the trends as sometimes things shift, i.e. from the store to the web. A good example would be Office Depot, whose store size is shrinking as more of its business moves to the Internet. Other external factors can play a role such as governmental regulation at the municipal, state, or federal levels, and a changing market. It is always a good idea to keep an eye on what your competitors are doing.

It’s always important to have a sound business plan in place and update it several times a year to ensure you are on track for the goals you set for your business. Even if you are not ready to expand right now, conduct an evaluation and ask yourself how you would tackle each of your challenges. Identifying how you will overcome these standard growth obstacles early on will aid you in forming the long-term strategic thinking and planning you’ll need to propel your business to middle-market status. Moreover, it’s always a smart idea to consult qualified advisors with experience handling these issues who can help ensure that you are on the right path.

James Cassel is co-founder and chairman of Cassel Salpeter & Co., LLC, an investment-banking firm with headquarters in Miami that works with middle-market companies. He can be reached at jcassel@casselsalpeter.com and www.casselsalpeter.com

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