Posted in practice on January 26, 2017 2:15 pm EST

Does Your AEC Business Really Have to Grow?

Of course. It's axiomatic. Businesses grow, or else they die. Right?


 

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TAGS: aec firms, business, new business,

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By Christian Doering

Businesses live or die on the microeconomic scale. Micro-growth is … imperative, but only for certain financial structures, such as public ownership.

One of the assumptions underlying current economic thinking is that growth is necessary, and is always beneficial. Increasing the Gross Domestic Product (GDP) is usually good, although how good and for whom depends largely on how GDP is measured. But that’s macroeconomics. Businesses live or die on the microeconomic scale. Micro-growth is also imperative, but only for certain financial structures, such as public ownership. Business school professors around the globe teach that if your business has raised capital by selling equity shares on public exchanges, your primary responsibility is to maximize shareholder value. Shares go up in price when their owners (and prospective buyers) expect the company to grow. So you have to demonstrate past growth and deliver credible projections of future growth in order to maximize shareholder value.

More to the picture

Well, that’s what they teach in business school. In the real world, this idea leads to a very narrow focus on quarterly financial reports and earnings conference calls. It creates a game in which CEOs and CFOs attempt to manage the expectations of financial analysts so they can “beat” estimates of revenue, earnings per share and similar metrics that influence markets. Of the corporations that are managed this way, a vanishingly small number have lasted longer than 30 years. So making growth an imperative could cause the early demise of the typical corporate entity.

If you raised capital by borrowing from banks, you also have to grow the business. If your cost of capital is high, your profits have to be even higher⎯otherwise you’re just paying interest and servicing your debt, which means you’re working for the bank, not for yourself. Maybe the bank encouraged you to borrow in order to finance growth: and now you have to try to grow your way out of debt.

That’s not always possible, however. Conventional economics treats growth as an imperative. It also recognizes something called the business cycle. Now, there’s a school of thought that says business cycles don’t matter to the really astute manager. When your industry is expanding, you can grow “organically” by attracting new customers and selling more to existing customers. When it’s contracting, you grow by acquisition, consolidating operations in order to reduce costs and increasing market share, so your company grows even while the market is shrinking. There are plenty of case histories about both scenarios, and almost none about the many businesses that mis-timed the cycle, which is all too easy. Cycles are only clearly apparent in hindsight, so we ought to excuse the many executives who overspent on customer acquisition and ended up making crippling losses instead of giant profits, or who overspent on their competitors and ended up wasting energy on internal politics when they could have been taking better care of customers.

Smaller fish, different ways to swim

But what about the small, privately held business with minimal debt: are those companies also required to expand? In certain economic conditions, at certain stages of the business cycle, it may be better to shrink to maintain the business as a viable entity. Plants don’t grow all year long. In colder climates, they have evolved to survive the winter months by going dormant. In wintertime, it’s nearly impossible to tell a dead maple from a live one. But in the springtime, sap buckets will tell you where growth is about to emerge.  continued >>

 

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