Unlike more traditional small businesses, expanding a family business can be a tricky undertaking. The unique nature of these companies, with their high-trust environments and quick decision-making, can make it difficult to grow. Many family businesses also worry that expansion will mean a change of work culture and how they function.
Here, we’ll discuss how to expand your family business without losing your grip on the inner workings of the company. We’ll also cover strategic financial management for your expansion.
Understanding the Need for Expansion
If you want to scale up your family business, the first question you should ask is ‘why?’. Identifying what’s driving your decision is the first step in assessing whether you’re ready to expand.
Our accountants highlight some common scenarios for expanding a family business:
- Consistent and growing profits. Your business’ profits are calculated by subtracting total expenses from net income. If your profits look promising, it’s an indicator that you’re ready for expansion.
- A stable customer base. Without sales, you can’t make profits. A returning customer base is proof that demand for your products or services is high.
- Demand exceeds supply. If your business is constantly selling out of products, or you regularly need extra help to deliver services, you may need to scale up.
- Market research supports your choice. If you’ve reached out to your target market about expanding and they’re supportive, it might be time to consider making the leap.
Assessing your readiness
Once you know why you want to expand, the next step is to test if you’re actually ready.
First, you need to evaluate your financial situation. Consistent profits are just one part of this. Every aspect of your finances – from cash flow to expense management – needs to be in good order. You also need adequate capital to fund an expansion, or the right measures in place to get funding.
Regular business reviews or internal audits can help. They allow you to evaluate your current performance, and spot any areas that need improvement.
Next, analyze your market. Ensure you understand your target market and their needs, and how expansion can serve those needs.
Finally, draw up a growth plan. This should include your expansion strategy – including who to employ and why – along with timelines and goals.
Market research and feasibility studies
Market research can help you assess whether you’re ready for expanding a family business. Your business needs to know what your target market wants, and whether there’s space for you to offer this among your competitors. That way, you can make sure your strategies align with customer demand.
There are two ways to do this:
- Primary research. Here, you collect first-hand data through surveys, polls and interviews.
- Secondary research. This means using information that’s already out there, like articles and online sources.
When conducting market research, include a feasibility study. Essentially, this is an analysis of whether your expansion plans are practically and financially possible. These studies include a range of topics, from staff and financial reviews, to future projections. For example:
- Resource availability
- A profitability analysis
- Reviewing managerial skills
- A competitor analysis
- Sales projections
- Pricing strategies
- Market share projection
Financial Forecasting for Expansion
One of the challenges of expanding a family business is knowing whether you’ll have enough money to do so. As such, you’ll need to conduct financial forecasting.
This involves making informed predictions about business metrics like sales growth, or for the economy as a whole. That way, you can make financial decisions based on economic conditions and plan for the future.
Techniques and tools for effective forecasting
There are many ways to conduct a financial forecast, but most follow the same outline:
- Choose a problem point. In this case, it would be expanding your family business.
- Select variables and a data set. This includes what needs to be considered, and how to gather the data to allow you to do that.
- Set a timeline for the forecast.
- Choose a forecast model.
- Analyze your data using your chosen model.
- Verify your analysis by comparing it to what actually happens.
Forecast models
A forecast can be conducted using the qualitative or quantitative models.
Quantitative methods rely on historical data to make predictions. For example, using past sales data to predict future sales.
Qualitative methods rely on information and experience. Although slightly more subjective, such methods can account for aspects you can’t predict using data. For instance, consulting experts to analyze your market conditions to predict future trends and performance.
Risk analysis and scenario planning
There are several risks associated with expanding a family business, and these should be considered when forecasting. Factors like competition, what the economy is doing, whether you’ll need new equipment, or a shift in customer needs could affect your business.
In addition, you should periodically review your business’ performance, in terms of sales, profits, and expense management. This can help you identify problem areas and create response strategies.
Scenario planning is a vital tool here. In a nutshell, this means planning worst-case and best-case scenarios for expansion, and setting up strategies for dealing with both.
Funding Options for Business Expansion
Expanding your business requires capital. But how do you decide on the best options? There are several ways of getting funding. These include:
- Bootstrapping. Your family could fund the expansion yourselves. However, this means you’ll need adequate savings in place.
- Crowdfunding. These sites are a great way to raise funds from smaller investors. While you can get donations from across the globe, in varying amounts, there’s a risk of not raising enough money.
- Bank loans. With established terms and repayment schedules, you’ll know exactly how much to repay and when. On the downside, loan approval depends on your credit score, and ability to repay debt.
- Angel investors. These are high-net-worth individuals who invest in your business in return for an equity stake like shares or profit. Although they can be a lifeline, most angel investors have strict vetting processes. Also, if approved, you’ll have to offer up that equity.
- Venture capital. Similar to angel investors, this is an exchange of equity for funding. However, this is done with a firm or fund rather than an individual.
- Government funding. Depending on your business, you may be eligible for grants. However, grants have a number of reporting requirements and competition is usually quite high, which can make it difficult to secure funding.
Maintaining Financial Control During Expansion
As seen above, some funding options require a trade of stock or shares. For many, this poses a threat to control, and a change of business culture.
When choosing a funding source, especially in the case of investors, you must select someone who has the relevant experience and expertise in your industry. Their interests should completely align with those of your business, to ensure continued success. Don’t be afraid to seek professional advice when choosing funding, and thoroughly review potential donors.
Strategies for managing cash flow and maintaining liquidity during expansion
Before expanding a family business, you need to strengthen your financial foundation. This includes budgeting, cost control, and managing cash flow.
To best manage cash flow, track money going in and out of your business regularly. Your cash flow statement is vital for this. Then, forecast future cash flow (by using expected income, expenses and cash reserves) to prepare contingency plans.
It’s also a good idea to keep a cash reserve set aside for emergencies.
The importance of budget management and cost control
When expanding a family business, budget management and cost control are essential. Cost control helps you estimate, identify, and reduce expenses.
After developing a comprehensive budget that you regularly review, monitor your expenses. Check if you can reduce these without sacrificing quality. This might mean switching to energy-efficient equipment or outsourcing non-essential tasks. Next, accelerate your cash flows. For example, you could renegotiate vendor terms, or source products locally to lower costs.
Implementing financial controls and audits
Internal controls ensure that your business upholds its financial standards for operational efficiency and compliance. This means having systems in place to ensure that each aspect of your financial management runs smoothly, according to GAAP and reporting guidelines.
One way to do this is through internal audits and reviews. This helps you ensure that your business complies with laws and regulations, avoids financial mismanagement, and has safeguards against financial risks.
The Impact of Expansion on Family Business Dynamics
By expanding a family business, you run the risk of changes to processes and control. Unfortunately, this often leads to family conflict, which is bad for your relationships and your business.
To prevent this, make sure that all members of your family are aware of any changes to their roles and responsibilities during expansion. Effective communication is vital here, and everyone should be included in decision-making.
One way to do this is to establish a family business constitution, which outlines the rules, roles, and responsibilities of family members in the company. That way, you have a roadmap for resolving conflicts and making big decisions.
Another option is to consult with a business coach or external advisor. They can help you set up clear guidelines for expansion, as well as what everyone should expect, in an impartial manner.
Strategic Investment in Expansion Projects
When expanding a family business, it’s good practice to invest in avenues that align with your growth strategy. This allows you to diversify your portfolio, and reduce dependency on a single income stream to minimize financial risk.
These investments can take many forms. For example, organic growth (like buying new premises for expansion, or coming up with new products and services), research and development, or acquiring other companies.
Whatever you choose, ensure that you can balance the short-term costs with long-term benefits.
Building the Right Team for Expansion
In many cases, expanding a family business lets you make use of existing staff, by equipping them with the tools and training for their new roles. But if it requires new hires, you need the right people. Naturally, this means employees with relevant experience and expertise. But it also means you need staff who can uphold your family and company values.
There are two ways to go about expanding your team. The first is to interview and hire everyone yourself. However, this requires input and collaboration with the rest of your family to ensure a good fit. As such, it can become a time-consuming and frustrating task.
Another option is to use an HR company or external recruitment agency to shortlist people who they think will be a good fit. This can save a lot of time, and ensure that you’re presented with choices from a smaller group of suitable employees.
Legal and Regulatory Considerations for Expanding
Depending on the scale of your expansion, your business might face several regulatory challenges. If you’re expanding across state borders, you need to be aware of multi-state tax rules and reporting requirements. Without a formal governance structure, this can be very frustrating.
Moreover, expansion might mean you need to improve a number of compliance areas. We suggest researching laws and regulations that apply to your business, and creating a compliance handbook. You’ll also need to structure your expansion to align with legal requirements, especially if you need to change your business entity type. After all, each entity has different reporting requirements, and different rules governing operations.
For guidance on the laws and regulations surrounding expanding family business, schedule a Discovery Call with one of our Family Business CPAs.
The information presented in this blog article is provided for informational purposes only. The information does not constitute legal, accounting, tax advice, or other professional services. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability of the information contained herein. Use the information at your own risk. We disclaim all liability for any actions taken or not taken based on the contents of this blog. The use or interpretation of this information is solely at your discretion. For full guidance, consult with qualified professionals in the relevant fields.
