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When To Branch Out

Like a houseplant with roots busting out of a clay pot, a healthy small business will eventually reach the point where the confines of its region won't sustain growth. At some point, the operation ha 8/25/2006 10:51 PM Eastern

When To Branch Out

Like a houseplant with roots busting out of a clay pot, a healthy small business will eventually reach the point where the confines of its region won't sustain growth. At some point, the operation has to branch out, but how do you know when the time is right?

Like a houseplant with roots busting out of a clay pot, a healthy small business will eventually reach the point where the confines of its region won't sustain growth. A small AV systems integration company might conquer one or several vertical niches in its home market only to find that the region has only so many new clients and that existing service contracts can only supply so much business. At some point, the operation has to branch out, but how do you know when the time is right?

Once this question is answered, a slew of others follow, such as: Should you acquire an existing operation or start from scratch? How do you staff such a location? And how do you make sure this new adjunct adheres to the systems and culture that made you successful enough to consider expanding in the first place? The tips and anecdotes of systems integrators who've already taken the plunge can help answer these questions.

Why expand?

Now employing 57 workers in five offices scattered about the Midwest, with projected sales of nearly $21 million this year, Indianapolis-based Sensory Technologies used a combination of acquisition and grassroots expansion strategies to more than double in size in short order. A number of factors motivated the company to grow.

Previously known as Video Images, the integrator — which reported sales of $7 million last year — made its first expansion move several years ago because it simply felt “cramped,” says company Principal Andy Sellers.

“We just felt like we were hitting the ceiling of Indianapolis in terms of market share,” he explains. “We felt like we needed to reach out to corporate entities that were looking for a technologically advanced company and were willing to pay for it.”

Sensing the potential to work with larger corporate clients in Chicago and Milwaukee, Video Images established small branch offices, each started from scratch and employing a lone sales rep. “We hired somebody with local sales contacts in Chicago and mentored her quite a bit,” Sellers explains. “Our director of sales spent a lot of time out there, and we supported her with engineers who would rotate up there for weeks at a time.”

However, as the AV integration business has consolidated in recent years, expansion has occurred more frequently through mergers or acquisitions. While Sellers went looking for his firm's first expansion opportunity, the next one found him on the field of his daughter's youth-league soccer team. It was there that he struck up regular conversations with fellow soccer dad Kevin Markey, a principal in Markey's Audio Visual, also based in Indianapolis. Those conversations led to the merger several months ago of Video Images and the sales and installation division of Markey's Audio Visual — and the subsequent folding of Markey's branch offices in Fort Wayne, IN, and Dayton, OH, into a Visual Images fold that was re-christened as Sensory Technologies.

“Kevin was looking to do some things on his own with the sales and installation side of the business, and combining the two companies gives us an opportunity to become more of a regional presence with more connections and better economies of scale,” Sellers explains.

Indeed, as Sensory Technologies shows, there are a number of motivating factors that lead integrators to add additional outlets. But timing is everything.

When is the right time to expand?

Before an integrator branches out, operations at the home office must be in order. If basic systems like accounting and payroll, human resource management, and information technology (IT) are to be effectively managed in a new location, they must first work efficiently at headquarters. “If you have screwed up internal systems, you'd better fix them before you open up a branch office,” notes business consultant Bill Sharer, president of Lambert, NJ-based Exxel Management and Marketing Corp. “It'll be much harder to fix them when you can't just walk across the hall.”



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When To Branch Out

Like a houseplant with roots busting out of a clay pot, a healthy small business will eventually reach the point where the confines of its region won't sustain growth. At some point, the operation has to branch out, but how do you know when the time is right?

You have to have your management, financial, and business practices in place before you can manage any more additional capacity, maintains Terry Daffinrud, CEO of Minneapolis-based Audiovisual Inc., which now employs 235 employees across 10 regional offices.

Cash flow is another key consideration. David Riberi, Los Angeles-based vice president of CCS Presentation Systems — who operates five offices in California for the Scottsdale, AZ-headquartered affiliate network — recalls his first lesson as a UCLA MBA student. The instructor presented the model of a business that's expanding leaps and bounds — its sales and revenue growing explosively. It ends up in bankruptcy court. Why? Nothing else matters if you can't pay the bills!

“Many projects in this business have very long lead times, and starting out cold, making the relationships, then the sales, then converting it all into cash is going to take a very long time,” Daffinrud notes. “It would be difficult to start a small office from scratch in a metropolitan area for less than $1 million in the first year, and I wouldn't expect profits for almost two years.”

Even acquisitions of existing offices — those with staffs, relationships, and contracts already in place — usually take a year to become profitable, Daffinrud says.

“You can get blinded by the opportunity,” Sharer adds. “But you must understand that expanding will always take longer and cost more than you think it will — no matter how well you plan.”

Where should you look?

Where an integrator chooses to branch out is as companies,” Sharer says. “What do they know that I don't?”

Local business trade publications are also helpful. Perhaps the most important question to ask yourself is, “What suppliers do we have that also live in that market?” Crawly says. “Those guys are a great resource for telling you about the local market. They always have a wealth of knowledge — they've already done this research.”

Crawly says manufacturers and suppliers are particularly helpful in regard to staffing a new facility. “We always ask, ‘Who do you know who wants to leave their company? Who do you know who is really good, and who would want to take something like this on,'” he explains.

Who are the right people to expand with?

The quality of personnel used in the expansion plan — and their ability to assimilate to an integrator's company culture — are of paramount concern. “This industry is about talent and relationships and the ability to maintain consistency,” Laughlin says. “If you get the right individuals, success comes easily. But if you get the wrong ones, which we've done from time to time, it becomes infinitely harder.”

Sharer advises integrators to seed the location with proven, predictable people. “You have to find out how well they'll reflect your culture, how well they understand your processes, and how they'll translate that culture through their leadership,” he says.

Recruitment and training methodologies vary widely. Generally speaking, key personnel will have the right combination of sales and leadership skills. “I look for a confident, independent person who knows exactly what they need to be successful and has a demonstrated ability to be successful over time,” Laughlin says, adding that the level of this key sales executive's technical expertise will determine how much engineering support he'll staff a satellite office with. “I have some markets where the sales manager is a very technical person who can have conversations with CIOs and CEOs to explain to them in detail how a system will work and what products are in it. A person with this level of expertise doesn't need an engineer in his back pocket. Other sales people might need to take an engineer with them, and we'll staff those offices accordingly.”

Of course, finding competent individuals is one thing, but getting them to do things your way is quite another. All sources for this article listed the continuity of company culture at the top of their expansion priority list. “The worry is that you'll have a renegade office that begins its own processes and goes away from what made us successful here in Indianapolis,” says Sensory's Sellers.

It's here where cost/benefit difference between starting a satellite office from scratch and acquiring an existing one evens out. “It's a lot easier to do it from scratch and grow slowly and methodically than to inherit one and have to change the mindsets of a bunch of people who don't work in the office next to you,” Sellers adds.

Whether the satellite facility is homegrown or acquired, face time is essential. Successful integrators conduct regular company-wide teleconferences involving all branch-office facilities as well as implement an indoctrination period in which new employees are brought to headquarters for training.

Still, Sharer recommends sending a small “SWAT team” to the new location for a period of up to six months to make sure the indoctrination goes smoothly.

“It could be one person or it could be more than one, and they can come home for weekends if they want to,” he says. “But I want somebody onsite who's a known quantity.”

Daniel Frankel is a freelance writer based in Los Angeles. You can reach him at Daniel.frankel@variety.com.



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