Need some direction? Here are 5 smart ways to build your business.

By Andrew J. Sherman

I have spent the better part of my professional life helping small businesses and emerging companies of all sizes in many different industries develop strategies to grow. I've also observed that entrepreneurs want their businesses to grow in one way or another-whether it's in terms of revenue, profits, number of employees or customers, market share, or number of locations. Not everyone has aspirations to build the next Roman Empire, but everyone wants to see progress from one year to the next, even if it's just in the amount of money they can take home to their families.

Given our rapidly moving and highly competitive marketplace, the challenge is how and when to grow. And these questions lead to other key questions that can be difficult to answer: What strategies should you use to facilitate growth in your particular business? Are there problems with your business structure that need resolving before you can implement your growth strategy? How can you build on your strengths and compensate for your weaknesses? Is this the right time to grow? That is, do you have a proper foundation in place for growth? 

Building your small company into something much larger is a marathon, not a sprint. If you draw a strategic parallel to a NASCAR season (that is, a series of long races as you accumulate experience, victories and defeats in pursuit of a long-term goal), then the five smart ways to grow your business break down as follows.

1. Double-check the functionality of your racecar before putting it on the fast track. Do you have the right foundation in place to grow your business? What are the strategic prerequisites? To grow your small business successfully, your company should have a strong foundation from which the selected growth strategy will be built, launched and monitored. As you build a platform for growth, make sure the relevant components listed in "Firm Foundation" (at right) are in place.

2. Chart your course. Have you drafted a business plan that will navigate your course and identify the human and financial resources you will need to get to the finish line? Have you determined when you will drive full speed ahead with your growth plans and when you may need to pull over for a pit stop? Does the plan include a sensitivity analysis to anticipate the inevitable surprises that the market will throw at you? Or the "what ifs?" If you have drafted a plan, then you may need to dust it off. Did you meet the goals and objectives set for the company last time you engaged in the planning process?
Why or why not?

Business planning is the process of setting goals, explaining objectives and then mapping out a plan for how the company's management team will achieve these goals and objectives. In essence, a business plan is the articulation of why your idea is a valuable opportunity, what resources it will require, who will provide the vision and leadership to execute the plan, and how you will reach your goals. A business plan should tell a compelling story, make an argument and conservatively predict the future. Remember, companies have different stories to tell, different arguments to make and different futures to predict. 

3. Make sure the car has gas. Financial capital is the fuel that serves the growth engine. How will you finance your growth plans? Will you seek debt or equity capital? How do the needs of these sources of capital differ? Virtually all money-raising strategies revolve around four critical factors: risk, reward, control and capital. You and your sources of venture funds will each have your own ideas as to how these factors should be weighted and balanced. Once a meeting of the minds takes place on these key elements, you'll be able to make the deal.

Risk: The venture investors want to mitigate their risk, which you can do with a strong management team, a well-written business plan and the leadership to execute the plan.

Reward: Each type of venture investor may want a different reward. Your objective is to preserve your right to a significant share of the growth in your company's value as well as any subsequent proceeds from the sale or public offering of your business.

Control: From the entrepreneur's perspective, the art of structuring a good deal is to give away only 20 percent of the equity while maintaining 80 percent of the control. But control is an elusive goal that's often overplayed by entrepreneurs. Venture investors have many tools to help them exercise control and mitigate risk, depending on philosophy and their lawyers' creativity. Only you can dictate which levels and types of controls may be acceptable. Remember that higher risk deals are likely to require you to surrender greater degrees of control.

Capital: Negotiations with the venture investor often focus on how much capital will be provided, when it will be provided, what types of securities will be purchased and at what valuation, what special rights will be attached to the securities, and what mandatory returns will be built into the securities. You need to think about how much capital you really need, when you will really need it and whether there are any alternative ways of obtaining these resources.

You'll also need to develop an understanding of the different types of investors: emotional investors, who invest in you out of love or because of a relationship you have with them; strategic investors, who invest in the synergies offered by your business (based primarily on some non-financial objective, such as access to R&D, or a vendor-customer relationship-financial return may still be a factor); and financial investors, whose primary or exclusive motivation is a return on capital, and who invest in the financial rewards that your business plan (if properly executed) will produce. Your approach, plan and deal terms may vary depending on the type of investor you're dealing with, so it's important for you to understand the investor and its objectives well in advance. Then your goal is to meet those objectives without compromising the long-term best interests of your company and its current shareholders.

Achieving that goal is challenging, but it is easier if your team of advisors has extensive experience in meeting everyone's objectives to get deals done properly and fairly. The more preparation, creativity and pragmatism your team shows, the more likely it is the deal will get done.

4. Make sure you have an experienced driver whom others trust. Leadership is a critical component of the business growth plan. It includes not only the CEO, but also the board of directors, board of advisors, and even the outside team of coaches, consultants, lawyers and accountants that you select to guide you along the growth path. Employees will pay careful attention to the integrity, experience and reputation of the CEO's "Kitchen Cabinet." 

In other words, fans rally around the driver, not the car. Who is leading the company, and how did they get there? Do people trust the driver and his or her vision? Are they willing to work longer hours and for less pay to help the company achieve its growth objectives? In Good to Great, Jim Collins discusses the importance of having the right people on the right bus in the right seats. Although I would never advocate entering a bus in a NASCAR race, the parallel to growing a small business is clear.

5. Carefully select your pit crew. Think of your vendors and suppliers as your pit crew. The relationships you build with them are the ones that will assist you in bringing your product or service to your target customers. How should your pit crew be selected? How effective have they been since they've been in place? If your current pit crew is not working, it will be difficult to grow your business.

Business growth is like a double-edged sword. When it is controlled and well-managed, it can provide you with tremendous rewards. When growth is poorly planned and uncontrolled, it often leads to financial distress and failure.

For many companies in highly competitive industries, rapid growth is the only way to survive. These companies must either act quickly to capture additional market share, or sit on the sidelines and watch others play the game. But do these competitive conditions justify unplanned and unbridled growth? Certainly not. Rather, the need for growth must always be tempered by the need to understand that long-term growth is the product of effective management and planning. 

Andrew J. Sherman is a partner in the Washington, DC, office of Dickstein Shapiro Morin & Oshinsky LLP. He is also the founder of Grow Fast Grow Right (www.growfastgrowright.com), an education and training company for executives of middle-market companies. He can be reached at ShermanA@dsmo.com.