The windows of business opportunity are opened through market expansion
Expanding into new markets is not always the top priority for emerging businesses as they seek out the guidance and expertise of private equity partners. However, market and geographic expansion can be effective ways to increase revenue, talent, and brand recognition simultaneously. Thoughtful expansion strategies minimize the risks while maximizing the benefits.
In this blog post, we take a closer look at private equity market expansion to better understand the strategies that safeguard ongoing growth and success. We also review the benefits of expansion and the reasons why standing still in a dynamic market is no longer a viable option.
The value of market expansion
Businesses with healthy profit margins, dedicated employees, and loyal customers may not be focused on entering new markets, but developing a sustainable growth strategy anchored in expansion is one of the most effective ways to increase revenue while building a resilient business model. Well-planned strategies combine geographic diversification with evolving product lines and marketing plans to ensure both new and existing customers are highly satisfied. Additional benefits of market expansion include:
- Economies of scale for the supply chain and key internal functions
- Risk diversification and protection from seasonal or geographic fluctuations
- Increased innovation through exposure to differing cultural perspectives
- New sources of demand for established product lines and services
The connection between growth and profitability is apparent in many of the world’s most successful businesses as they carefully choose expansion opportunities that do not forsake profitability. This delicate balancing act is the key to achieving mutually beneficial outcomes.
Business expansion vs. business growth
The terms growth and expansion are often used interchangeably, although the two concepts are somewhat different in their meaning and execution. Business growth can take many forms, but it is usually measured in terms of revenue, profit, and market share, even if this is accomplished by increasing the sales volume of existing products to current customers.
Expansion is a specific growth strategy that includes deliberate efforts to extend the business into new markets, establish or acquire new facilities in other regions, and continually develop new product offerings. To achieve these objectives, expansion plans require more advanced planning and resource allocation than general growth initiatives.
Exploring the avenues of expansion
Deciding on the right expansion strategy for portfolio organizations is the result of meticulous brainstorming, collaboration, and planning. Valesco’s Value Blueprint is a useful tool to assess gaps in talent, service quality, customer diversity, and other high-impact areas that can be addressed through market expansion, in concert with operational improvements and right-sized business tools. A successful private equity growth strategy might combine several available expansion options to ensure long- and short-term business objectives are achieved.
1. Add-on acquisitions
In the realm of private equity, an add-on acquisition refers to the purchase of a smaller business by an existing portfolio company. The acquisitions are selected based on both synergies and differences. For example, a software provider might acquire a small company with similar offerings that is already well-established in a geographic area the platform business wishes to expand into.
Additional benefits of add-on acquisitions include boosted buying power, access to leadership talent, cross-selling opportunities, and enriched product breadth and depth. The risks associated with this growth strategy should also be considered, since product commonality can create internal competition, and business culture misalignment can lead to disputes and turnover.
2. Digital sales and marketing strategies
For many growing businesses, especially small retail and manufacturing companies that evolved based on a brick-and-mortar model, online sales and marketing strategies represent untapped opportunities for geographic diversification and customer acquisition that require very little investment or infrastructure. Creating an effective online strategy improves brand awareness while allowing even the smallest businesses to compete with industry giants on a level playing field.
Over 70% of small businesses already have an online presence, but digital sales and marketing strategies go a step further by leveraging search engine optimization (SEO), social media, and personalized content to attract more customers and tailor offerings to specific regions and segments. Businesses that pursue expansion through digital channels should also pay close attention to potential pitfalls that include internet security issues, regional sales regulations and taxes, and higher product return rates.
3. Organic expansion
Organic expansion strategies, where growth is achieved by opening new facilities and expanding product lines using existing resources, are low-risk alternatives to add-on acquisitions. Entering new markets organically can also take much longer, with the extra time spent on product development, facility retrofitting, and staffing in new locations potentially creating a competitive disadvantage.
At the same time, organic expansion can improve retention and morale by creating opportunities for existing employees, and eliminating the possibility of product line or cultural misalignments that can undermine expansion objectives. Organic growth also helps to preserve brand identity and eliminate the customer apprehension that can accompany mergers and acquisitions.
Market expansion risks
Private equity market expansion also brings financial, operational, and cultural risks that must be mitigated to preserve the important benefits and advantages. The risk factors PE firms consider as they guide portfolio organizations through an effective growth strategy include:
- Product/customer synergy in new markets and geographies
- Internal resource strains leading to compromised quality
- Entrenched competition in new locations
- Currency fluctuations and downturns in international markets
Private equity partners mitigate these risks through planning, market analysis, and due diligence processes that carefully weigh the cost of each acquisition, digital expenditure, or new facility against the expected revenue and market share gains. This foresight and expertise change the organizational mindset from apprehension to excitement as expansion plans unfold.
Examples of successful market expansion
The benefits of market expansion can include increased product offerings, reduced costs by streamlining staff and resources, and countless opportunities to gain valuable customers and contacts in new locations. Fast-closing add-on acquisitions can be particularly beneficial, especially when they are preceded by market mapping and other proactive research strategies that ensure alignment between the two organizations. Valesco has a proven track record of success guiding small- to mid-market companies through these market expansion initiatives.
Examples of successful market expansion
T-H Marine Supplies is an example of aggressive geographic expansion accompanied by exceptional sales and EBITDA growth. After significant operational consulting and a SKU rationalization process, T-H Marine completed five strategic add-on acquisitions, adding complementary product lines quickly to leverage new aftermarket sales opportunities. Similar results were witnessed by electronics component supplier Principal LED, with four add-on acquisitions expanding their existing territory on the way to 396% sales growth.
Examples of successful market expansion
Breaking out of the comfort zone to expand into new geographic markets can be an intimidating prospect for business owners who have built their teams, products, and customer bases on familiar ground. A private equity partner makes this transition easier by carefully evaluating market opportunities and gaps in relation to existing leadership, demand, and product line parameters and developing a plan for predictable growth and brand enhancement. While organic expansion and digital sales channels are logical options for many organizations, others benefit from strategic add-on acquisitions to complete the missing pieces of the puzzle. The resources and expertise of private equity partners ensure the benefits of expansion outweigh the risks.