Understanding growth: what do the numbers really mean?
For many companies, growing their business beyond 5mn or 10mn in revenue is really difficult and lots of companies fail to break these numbers and scale successfully. But is it really all about the numbers and what does good growth really mean?
When it comes to M&A, there is no escaping the fact that one of the first looks will be at a P&L or an income statement.
However, we need to understand what those numbers mean, the context that surrounds those numbers, the drivers of those numbers, and whether or not those numbers and trends are going to continue. So there has to be a good understanding as to the “whys” behind the numbers.
For Tuyen Ho, Global Head of Corporate Development at Welocalize, there are two flags to look out for when analysing a company’s growth.
The first is customer concentration.
“It’s very natural when a company is starting out that they will only have a handful of clients,” Tuyen says.
“And if they’ve been doing an excellent job for these clients, they’re going to grow with the client. And they may not have the bandwidth to be looking at growing additional customers.”
“But when we see numbers that say, hey, there’s only one or two customers driving the growth here, we don’t stop there. We kind of look at the next level as well and ask what did this customer or cohort of customers help the company to do?
“For example, were these customers very mature in their expectations of what an LSP needs to deliver? And therefore the LSP was able to figure out how to operationalize the growth, maybe by being in two different continents so that there is better time zone support.
“And so building that as a competency really sets the stage for future growth.
“Because now not only can you support this customer, but also another customer like that customer with not as much friction involved.
“So the customer concentration can highlight that there are opportunities to leverage. It’s then identifying those opportunities and taking it beyond just simply reacting to the fact that the customer is giving you more and more volume.”
The second thing to consider when analysing company growth is how sustainable is that growth.
“Growth can impact profitability,” Tuyen says.
“If you are growing so fast and you’re not paying attention to how that growth drops to the bottom line and how that growth impacts your team, that’s going to be a challenge for future growth.
“So you may be showing really great growth over the past couple of years, but if there are shrinking margins, and your costs are growing much faster than your revenue, how are you going to rein that in later on?
“Or if that growth has an impact on your team. You’re going to then be challenged with operational retention issues.
“Or if you’re stretching and you haven’t been keeping engaged with your customers and there’s now customer service level issues or quality issues.
“So the numbers could show really nice growth but what is happening behind that growth? And are you going to be able to repeat and scale that growth going forward?
“It is super important as an executive team or a management team to make sure that you have a future story to tell, as well as a past story on growth.”
If you want to know more about this area, visit Lion People Global’s website where you can watch back our M&A Talks series of videos and fill out a questionnaire that entitles you to one hour’s free consultation on getting a LSP or language tech business ready for sale.