Scalability is the capacity to increase the size of your operation without a breakdown in processes, communications, or efficiency. Highly scalable companies are characterized by the ability to increase capacity without a huge increase in overhead. In other words, highly scalable companies have minimal impediments to growth.

For example, a grocery store is highly scalable. Simply restock shelves more often, and add more checkouts, and you can accommodate a huge increase in sales volume. Notice that you rarely see a grocery store with the all of the tills open? That’s because the additional overhead from that extra capacity is so inexpensive that they build in a large amount of excess capacity from day one. Conversely, I would not consider a restaurant as scalable, because it requires a large capital investment to add more kitchen equipment and space to the dining room. If business slows down, it is very difficult to scale back the operation.

How scalable is Google? Just add more servers!

How scalable is your business? One day, you may wish to sell it. Scalability will have a huge impact on its value.

Lets consider the following potential buyers: individuals, competitors, and strategic buyers.

Individuals will simply use standard valuation tools like discounted cash flows or multipliers of sales or earnings.

Competitors will do likewise, only you have the added disadvantages of exposing your trade secrets to a competitor, and selling to somebody whose understanding of your market space means that they are certainly going to by buying the steak, not the sizzle. For these reasons, competitors are considered the worst audience to try to sell your business to, yet most entrepreneurs go there first, thinking their competitors are the only ones who “get it”.

You will only get top dollar for your business from a strategic buyer. Why? Because they will be buying with the intention of leveraging their position to massively transform your business. If there is synergy between the buyer and seller, the strategic buyer will pay far more than any individual or competitor ever would!

In order to realize the potential gains from the synergies, strategic buyers need to see well established and documented processes that can scale to a much larger operation. This is absolutely critical if you wish to get top dollar. Their strategy may be to use their capital and expertise to geographically expand your business, or use their distribution network to grow sales of your product. Either of these approaches will require a well defined and documented operation in order to be successful.

What can you do to make your business more scalable?

Take a look at your own business. How can you make it more scalable? How can you take a fixed cost and turn it into a variable cost?

Some examples:

• Contract out easily replicated parts of your business, such as creation of components, to a larger company. You will reduce your overhead, and make that part of your business more scalable.
• Standardize and simplify processes as much as possible. You will minimize training requirements for new staff and expand your pool of potential labour.
• Simplify your product or service lines. How much complexity are you adding to your sales, marketing, and operations by trying to “do it all”? Determine how much contribution each product or service line is making, and weigh that against the added complexity it brings to your operation.
• Create “self-service” approaches that reduce the need for human intervention. Some examples are online ordering, providing account information, service or product notifications to keep your customer informed, or improving displays to make purchasing easier and products easier to find. Can you imagine a restaurant without menus or a grocery store without price tags? Now take it to the next level! Communications is the key!

The benefits of scalability can be huge. A Fractional Executive can help. Contact us today for more information.