Why Small and Midsize Companies Become Large

business growthDid you ever wonder why small companies want to grow? Large companies are a headache and have complex personnel, accounting and legal issues. But most people want to grow. Why? Having been a senior executive from start-ups to Fortune 500s, we have seen what it takes and why people give it their all to become a big fish.

Those who start companies want to run things and large egos, and for sure being large has its advantages; including:

  • Large companies tend to fail less often and survival is no easy chore as 37 percent fail in the first 4 years. Of course there are no guarantees in life, but like fish, being a small is more hazardous then being a large. The fast you grow to reach critical mass the greater your chance for survival.
  • They are able to attract more talented employees and advisors. The best candidates want to work for a named company, someone offering better compensation and perks, opportunities for advancement, able to learn from seasoned executives and even brag to their friends that they work for someone they have hear of.  If you are small or midsize company, you have a harder time landing these folks.

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  • They can absorb the loss of key clients or employees. A larger company has greater difficulty on replacing key staff as they can’t afford to have a strong bench. Once a key person is lost everyone scurries around to replace them and as noted above that is easier said than done. The loss key clients is similar as smaller companies have by their very nature fewer clients and hence greater risk then. Your clients often recognize this and are prone to lowering the boom on pricing as they know your vulnerability.
  • They can command a higher price upon sale, raise capital less expensively. The greater the number of key employees and clients the more stable a company is and hence the higher its P/E or EBITA multiple is. This multiple is higher for high growth companies due to the magic of compound interest. One will double their size in 5 years if they grow at 15 percent per year, it will take 10 years at 7.5 percent growth and 15 years at 5 percent growth, which is reflected on valuing a company for sales. Likewise a larger company can borrow at a lower rate than smaller companies, all things being equal, do the stability of larger companies.
  • They can use legal donations, perks and entertainment to obtain favors as a special interest. In the real world of politics, one can get through to legislators at various levels to influence to craft legislation favorable to them. This is done through campaign financing, providing volunteers and the use company facilities i.e. private aircraft.
  • They can amortize fixed cost and negotiate lower cost due to their buying power to increase profits. Fixed costs that can be spread over a larger base (i.e. One CFO for the company regardless of size) and one can get a larger discount when buying in volume (i.e. lower healthcare costs for a larger pool of employees).
  • They can fund investments and buy other companies. A larger company can buy a smaller company and even use stock to do so. Growing via acquisition (of course done well) expedites growth and increase a company value as noted above.
  • They can establish their brand name. As noted above quality people want to work for a well know name and clients want to buy from an established company. Building a brand can best be done by becoming large and promoting your brand via advertising.
  • They can enjoy both a nice life style and retirement. The purpose of having your own company is to build value and eventually cash in on that value to enjoy your life after working hard. As noted in the P/E, EBITA multiples, this is easier done the more you can sell your company for and the larger the company the more it’s worth (again all other things being equal).

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Michael Neidle

Michael Neidle
Michael Neidle is president and CEO of Optimal Management, an advisor to staffing firm owners and managers.

Michael Neidle

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