Four Recent Growth Trends among Small Companies

When it comes to company growth trends, it is safe to state that there has been enormous change since just 1999.  In 1999-2000, the median sales of a company going public has gone from averaging $15 million to averaging a whopping $164 million just 4-5 years later in 2004.  The fact is that smaller companies have decided not to go public as often as in the past.  As a result, companies are able to amass cheap money but the question, of course is, “Why?”

Skipping IPOs

It is safe to state that a company with $15 million in annual revenues would likely not be too interested in an IPO.  A company with this level of annual revenue would not want to absorb the attendant costs as well as other on-going fees associated with going public.  Such a company would have little interest in spending the money necessary to comply with Sarbanes-Oxley regulations.  It is quite costly and laborious for small companies to go public and then remain public.

Merging with Larger Companies

It has become a common practice for CEOs to merge or acquire other companies when they are looking to quickly grow their businesses.  Yet, it is also quite common for these mergers and acquisitions to fail and later get sold off.  The trend has been for larger companies to acquire smaller ones to help facilitate growth, and this means that many smaller companies simply don’t go public due to the costs and compliance issues.  Instead, they want to be acquired by larger companies.  This is a trend that is quite common in manufacturing.  In particular, if a larger company is looking to add growth, then acquiring a small service company, one that provides complementary services, can be an excellent way to achieve that goal.

Focusing on Core Business Attributes

However, many companies are also divesting themselves of companies that fail to fit with their overall core strategy.  A prime example of divesting is McDonald’s purchasing of Boston Market, which was part of an effort to continue McDonald’s growth.  In the end, however, McDonald’s discovered that a more appropriate strategy was to focus on their core business instead of working on the development of new concepts.  Many companies ultimately realize that they are better off divesting and focusing on their core business.

Offering New Products and Services

It is also possible for companies to essentially reinvent themselves by adding new products and services that are more profitable.  Not surprisingly, this strategy can boost a company’s value.  A smaller company is usually a more agile one and, as a result, can introduce new products and services more quickly than a larger company.  Products or services that are not profitable can quickly be replaced with products and services that are profitable.  In short, experimentation and adjustments are easier for small companies than large ones, at least most of the time.

Small companies are less likely to go public as they can quickly shift gears and improve their profits.  These same companies are also likely to become acquisition targets of larger companies looking for rapid ways to add growth.