When To Stop Growing

Companies should stay true to their business model, even when tempted by big-name partnerships and acquisitions.
Marielle SegarraJanuary 31, 2014

At CFO, we write a lot about growth. I tend to assume that most companies want to grow, in employee size, revenue, market share, geographical location or another arena.

But I’ve also realized that growth looks different to every business. What may seem like a dream opportunity for a smaller company — one that could bolster revenues and fund even more investment — may actually be a trap.

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Analysis_Bug3Take, for instance, the independent children’s book publishing company Barefoot Books, founded in 1993. In an interview with Forbes, co-founder Nancy Traversy talked about the reasons the firm stopped selling its titles in chain stores like Borders and Barnes & Noble, and through online retailers like Amazon. Barefoot’s business relies heavily on “ambassadors,” typically mothers who sell the books through events at their homes and through their children’s schools. But in the United States, the company also sold its books at chain stores for three years — a “soul-destroying” experience for Traversy:

“The books were just a commodity. You had to pay for ‘table real estate’ … pay for the space and often books came back – this is a returnable product. We sold better in some areas than others but we never really knew how much we’d sell or how much we’d get paid. We’d be getting returns and reorders on the same day!”

The company actually made more money when it stopped selling through Barnes & Noble in 2006, Traversy said. Later, the co-founders also realized that partnering with Amazon was gutting its ambassador business:

“We shipped to them and then I realized how much they were discounting our books. Our World Atlas, for example: Amazon was selling it at 60 to 70 percent off the published price, and our Ambassadors couldn’t  compete. … We realized that if we weren’t selling to the chains, we shouldn’t sell to Amazon: we should focus on the model that we started. The decision to pull – maybe it was brave, but it was the right one. It’s too easy to be dragged in and it felt dishonest: we were competing against our own channel, and I knew I  could never scale the Ambassador community if I was working with Amazon.”

CFOs at larger, faster-growing companies might think there’s little they can learn from the story of an independent children’s book publishing company. But there’s something universal in Barefoot’s story. It’s not that the company didn’t want to grow its business. Rather, it chose to grow in smart ways, and to eschew the shiny, tempting opportunities that come with a big name but aren’t right for the business.

Barefoot’s story is relatable, even on a personal level. It’s hard to say no to a prestigious opportunity. If you were the CFO of a technology company, and Google came knocking asking you to be its finance chief, would you think twice? It’s sort of the same idea here. If your firm has its name attached to a larger company, it would reach more customers and might gain prestige by association. That’s why you have to keep a straight head when such opportunities arise.

Barefoot’s experience also brings to mind a different company, whose finance chief I interviewed earlier this week at CFO’s Corporate Performance Management conference in New York. Steve Storch is CFO at Imagem Music, a music publishing company that represents the catalogs for artists like MIA, Daft Punk, Counting Crows, Elvis Presley, Pink Floyd, Phil Collins and Genesis. Imagem, like Barefoot, is an independent. But it also recently completed several large-scale acquisitions, and it’s using the resulting cash flow to grow its pop and contemporary music divisions.

During our interview, Storch said that starting at Imagem was an adjustment for him. As a former finance executive at CBS Records and CFO at Sony/ATV Music Publishing, which owns The Beatles catalog, he was operating under the assumption that Imagem had aspirations to be a behemoth. “When I first joined the company, I told our owners they want to become one of the majors,” he says. “And they sort of said, ‘No, we don’t really want to be a major. This is our niche. We want to remain independent. We want to stress that we’re a home for clients who want more attention, greater service.’”

The company still wants to grow, Storch admits, “because with growth comes profitability. The music business has historically always been about scale. The larger you are, the more profitable you’re going to be.” But that growth has an upper limit. “We don’t ever want that scale to interfere with our ability to service our clients and to represent what we really are, which is a place for the highest-quality songs and writers. Yes, scale is important but only to a certain extent.”

Wise words, no matter what the size of your company.

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