A commonly held assumption is that continuous growth should be the goal of every business. Yet a recent article on Inc.com, Lessons from the Private Equity Playbook, makes the case for shrinking your business – in the short term – as a means to greater growth in the long term.
When a private equity (PE) firm acquires a business the first thing it often does is to eliminate business units, stores, product lines, and/or people that are thought to add little or no value. Short-term revenue is sacrificed. Why? To consolidate focus and resources in areas with higher potential for both revenue and profit growth.
How do PE-backed companies perform? A WSJ.com article reported that in all but one of the past six quarters, revenue growth for PE-backed, mid-market companies exceeded that of their non-PE counterparts by at least 24%. And the Inc.com article reported that in 2014 mid-market companies backed by PE firms grew jobs by 6.2% compared to 4.5% for companies not backed by PE firms.
So, sometimes you have to shrink to grow. And if your company isn’t backed by a PE firm, you might want to act as if you were.