CFO consulting for Colorado companies working to change the world, one P&L at a time.

Case Study 3: We want to grow our business—organic or through acquisition?

The Need for Organic Growth

Overview: A successful local retailer who had been around for several years and had established a strong reputation wanted to leverage it to expand operations. New developers and prospective partners had emerged to expand shops in town, throughout the state, and nationally. Global dominance seemed only a contract away, but they wanted to preserve their ownership culture and hadn’t a clue how to really evaluate and execute a growth plan, though they were pretty certain they could “just do it.”

Analysis: For most mid-size companies how do we grow? frequently turns into a question of can we afford to grow through acquisition or do we need to grow organically? This is often lost in the more enjoyable “ideating” phase of expansion. As obvious as it may seem, few stop to think of some of the practical and financial restrictions that may surface in shifting manufacturing to Mexico or a call center to Vietnam—like how to really set up a local bank account to pay employees.

Clearly these were not pertinent issues for the retailer, who looked at their business model and realized they were in a competitive industry with modest gross margins, high inventory and overhead costs, and low net margins. To grow their physical business organically by opening new stores or purchasing existing competitors in great new locations they would need considerable capital they didn’t have and their current business didn’t supply. This meant they would need external financing. The problem was that they’d never forged strong banking relationships previously and few banks really want to gamble on a retail expansion. Private equity investors tend to shy away from small restaurants and retailers, also.

There are absolutely compelling cases to be made for growing mid-size firms through merging/acquiring other firms or capabilities. This wasn’t one of them. Typically you need an industry/company that is more specialized (like biofuel research), generates higher margins and cash flow, or has strong financing partners.

Ultimately, the retailer was faced with the reality that their great business everyone wanted to work with, no one wanted to help bankroll any growth plans. Around this time the awkward questions began coming our way of how much money was kept in ATM machines and approximately how heavy were they?

Before reciting these figures off the top of our heads, we felt it was worth offering again an alternative mentioned early in the process: organic growth by going online. Most of the startup costs for such an endeavor they already had—a physical location and staff for inventory, storage and distribution; credible brand recognition; a loyal customer following with extensive marketing lists; and a website. All they really needed was a better, e-commerce site, which could cost as little as $25,000.

Result: We began modeling financial projections while curiosity piqued and interest mounted. When models showed worse-case scenarios with 2-3 times their current net margins with start-up costs they could easily manage, they made the plunge.

The exciting thing about this case is it’s still unfolding. The owners were receptive, as were bankers, who saw lower capital requirements, higher profit margins, as well as greater margin for error and less overall risk. Nearly all the banks liked the idea and were willing to support it. As the website is currently under development you’ll have to check back in a few months to read how the venture turned out!