WARNING : BEWARE THE ALLURE OF DIVERSIFICATION

 

Risk Concept

 

Sometimes as a business owner we ask ourselves – should I focus on my core business or should I diversify?

Is the ‘grass greener on the other side’?

The allure of massive growth and excessive profits can be extremely tempting but be careful…..there are dangers ahead!

I will also share with you later in this article, the 2 main benefits of selling your business to a strategic buyer so you can maximize your exit.

I reflected on the question whether to diversify or focus on your core business this week as I read the press.

An important and salutary lesson was illustrated as the results of Tesco, the UK’s largest supermarket, were released.

The benefits of ‘diversification’ are as follows:

  1. To grow and improve cashflow and profits.
  2. To make use of surplus cash.
  3. To escape from difficult industry environments.
  4. To protect from failure – if product A fails, we always have products B and C.

Wheelbarrows, cappuccinos, movies…..Tesco has invested significant sums of money over the years diversifying but has it been a success?

Tesco is the UK’s largest supermarket with 28% market share.

The idea was to get into higher growth businesses and break into international markets.

Some of the moves were started by Sir Terry Leahy who ran Tesco from 1997 – 2011.

The big push came under his successor, Philip Clarke but his tenure ended in significant losses so he left in 2014.

Since then the new leader, Dave Lewis, has been disposing of ‘non-core’ businesses.

Here’s a brief list of Tesco’s ‘diversification’ acquisitions:

1.    Giraffe Restaurants

They bought Giraffe in 2013  for $75 million. They have expanded the business to 60 restaurants but it’s losing money and they are looking to sell.

2.    Dobbies Garden Centres

They bought Dobbies in 2008 for $75 million and, last year, they lost $72 million. It’s up for sale.

3.    Harris and Houle Cafes

They bought a stake in this business in 2013 and took full control this year. It’s losing $31 million.

4.    Fresh and Easy

They opened in the US in 2007 but 5 year losses followed and they finally sold in 2013. They spent over $1.5 billion! 

5.    Black Box Entertainment

In 2011 they bought an 80% stake but experienced heavy losses and sold it last year to Talk Talk. 

6.    Nutricentre Health Supplements Stores 

They originally invested in 2001 and the idea was to build up a chain but it never happened and last year they lost $12 million.

So, was diversification a success for Tesco? Clearly NO….

When considering your options of focusing on your core business or ‘moving to new pastures’…..think very carefully!

There is a separate and important point to take from Tesco’s diversification strategy….there will always be ‘large strategic buyers’ looking for opportunities.

In 2 previous blogs, I have highlighted 2 strategic acquisitions for small and medium sized businesses:

  1. 5th February – ‘ 250 Million Reasons Why You Need To Sell To A Strategic Buyer’
  2. 11th March – ‘Revealed : Big Businesses Routinely Over Pay By 500% For Small Businesses’

When you sell your business and maximize your exit, the benefits of selling to a strategic buyer like Tesco are as follows:

  1. They pay premium prices
  2. They have ‘their own good reasons’ for buying your business

So, reflect on your business and consider why a strategic buyer would pay a premium price to buy it.

There are immense rewards at stake.

To discover how to sell your business to premium priced buyers go to www.maximizeyourexit.com/sell-smart-net-what-youre-worth-t and benefit from a generous 75% discount

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