CHAPTER 11
When you are dealing with fast growing companies, pay special attention to how the business has been growing recently and what plans the management has in place to grow the business in the future.
What Is the Company’s Growth Recently? What Plans Does Management Have to Grow the Business?
Let’s consider a restaurant. When the business is small and successful, the owner can expand from one restaurant to multiple restaurants in the same city simply by using the cash flow from the business and the help of a bank loan and credit lines. When that expansion is successful, the owner can look for private equity money to expand to the state level and open up many more restaurants. After that expansion is successful, the next step is to raise money from the public market and start opening many restaurants in other states.
If the restaurant was growing at around 20 percent in those early years, that would be excellent. If senior management lets success go to their heads, they may feel that they want to grow even faster. They may want to reach the national level within three years. However, the economy may have been stronger when the restaurant was in its infancy. To compensate, management starts borrowing money and trying to open new restaurants as soon as possible. When businesses are growing that fast, management tends to make costly mistakes, such as hiring the wrong people, choosing the wrong locations, not anticipating supply chain problems, or providing inadequate training ...
