The term “business expansion” generally means that the business will be marketing its product to a wider consumer base, the goal being to increase sales. However, there are many other ways in which a business can expand. Some common examples of this include, but may not be limited to:
- Selling more of the same product;
- Widening the range of products or services that are sold;
- Selling an entirely different type of product; and/or
- Changing the underlying concept of the business.
Whenever a business engages in expansion, it is necessary to ensure that the business is complying with the various laws and regulations in the area that govern businesses. Increased business activity comes with an increased responsibility to provide safe products and/or services to the public.
There are essentially two aspects of business expansion. One aspect is planned and carefully managed expansion, at the business owner’s initiative. The other is considered to be more sudden and involuntary expansion, which happens due to economic expansion.
Alternatively, it may happen simply because the business has caught the market’s attention with a novel product or service. The Small Business Administration lists “unexpected growth” as one of the 10 causes of business failure. Whether it is planned or involuntary, business expansion comes with many risks and responsibilities.
What Is Planned Business Expansion?
Planned business expansion occurs when the business management intends to expand business activities. As such, the board will generally create a suitable business plan in order to implement the company’s goals. There are some specific instances in which planned business expansion may actually be necessary in order to avoid losses associated with unexpected changes to the market.
The specifics of each expansion plan will differ according to the company’s unique needs. However, some examples of actions that planned business expansion can be based on include, but may not be limited to:
- Introducing a new product into the market;
- Transferring an existing product into a new market;
- Establishing a business chain or franchise
- Business growth through merger, acquisition, or takeover; and/or
- Marketing the product overseas in foreign markets.
Planned business expansion is often compared to starting a business from scratch, the difference being that the planners may have a minimum base to start the project with. It is generally necessary to work with a business lawyer for assistance with business laws and regulations, especially when an expansion involves an acquisition or takeover.
It is important to note that especially in small business, not all owners wish to expand. This could be because they started their small business in order to maintain:
- Close contact with customers, employees, or the product/service itself;
- Freedom from the burdens of administrative management; and
- The autonomy that sole-proprietorship often provides.
Businesses who undergo planned expansion frequently have a different vision of the business, where smallness is viewed not as a goal, but rather as a necessary starting point. Other businesses plan to expand because a larger size is desirable in terms of being able to achieve its highest potential.
Each of the aforementioned strategies for planned expansion carry additional alternatives, some of which may require considerable risk. An example of this would be how selling more of the same may involve:
- Regional expansion of outlets;
- Significant expansion of production facilities;
- Vertical integration, meaning more of the product is made in-house; and/or
- Restructuring the distribution system.
To summarize, planned expansion (especially based on more complex strategies) is similar to starting a business from scratch. An exception would be that a running business provides the owner with a minimum base from which to start. Essential administrative structures already exist, even when it is necessary for them to expand.
What Is Unexpected Growth In Terms Of Business Expansion?
Unexpected growth occurs when a business experiences significantly more business than is expected or planned for. While this generally entails more profit for the company, it can also force the organization into a situation which requires rapid adaptation to the growth.
For many businesses, unexpected growth can actually cause more issues than the amount of benefits it provides. An example of this would be how a small business may have inadequate cash flow in order to handle the increased number of orders. This could be due to lag time between sales and cash collections, and is especially true when customers have paid in credit. This unexpected growth can result in an increase in bills for the company, and could lead to bankruptcy under especially serious circumstances.
Because of these risks, it is not uncommon for many small businesses to purposely choose not to expand in the face of unexpected growth. When conducting start-up business planning, every company should be prepared for what to do if they experience unexpected growth in sales.
Unless managed, unexpected growth may lead to careless decisions, as well as a temporary relaxation of the disciplines that made the business successful to begin with. However, unexpected growth is a challenge that may be unavoidable. An example of this would be how if the business deliberately chooses not to respond to strong demand may be left behind and find itself contracting.
The largest challenge presented by surging growth is generally associated with finances. As previously mentioned, a business may need to expand capacity, and money will need to be spent in order to purchase inventory that exceeds planned levels. In terms of service-providing businesses, new people must be hired and trained quickly. Additionally, the business may be able to calculate its immediate financial needs, but struggle to assess the sudden demand.
Most business failures caused by unexpected growth involve issues with cash flow. The business may have excellent sales and high profits, but the amount of cash in hand may be inadequate due to the previously mentioned factors. While customers will expect to purchase on credit, commercial customers may be slow in paying. Cash receipts generally lag sales and deliveries. Should the unexpected growth continue, the business may be unable to pay its bills, even though it has more than adequate resources coming in at a later date.
Other managerial issues can occur simply due to the fact that the business is operating now at greater speed, with more people who are not yet fully trained. Additionally, stressed management is less likely to find time to examine financial control systems which may be over-taxed. Some problems that are caused by an intense increase in business activity may arise at a later date and cause issues.
What Else Should I Know About Business Expansion?
Economic growth is believed to follow a cyclical path, continuing to repeat itself over time. This process is referred to as the business cycle and can be broken down into four phases:
- Expansion: This occurs when the economy is moving out of recession. Some indicators of this phase include:
- Money is inexpensive to borrow;
- Businesses build up inventories;
- Consumers start spending;
- GDP rises;
- Per capita income grows;
- Unemployment declines; and
- Equity markets generally perform well.
- Peak: The expansion phase eventually peaks, as sharp demand causes the cost of goods to soar. Suddenly, economic indicators halt their growth;
- Contraction: Economic growth begins to weaken. In response, companies stop hiring as demand tapers off, and then begin laying off staff in order to reduce expenses; and
- Trough: The economy transitions from the contraction phase and back into the expansion phase. The economy hits rock bottom which paves the way for a recovery.
On average, expansions last four to five years. However, business expansions have been known to last anywhere from 10 months to more than 10 years.
Do I Need A Lawyer For Business Expansion?
Working with an experienced and local commercial lawyer can help you manage your business’ expansion, whether planned or unexpected.
An attorney can ensure you are adhering to your local laws, as well as assist during business planning and suggest ways in which your company can accommodate changes in the future. Finally, an experienced business attorney will also be able to represent you in court, as needed.