Growing Business

Should you diversify your business?

FCL UK is a successful logistics company based in the West Midlands,
which operates on a global scale. Founded by Kulbir Sohi and Purvinder
Tesse in 2003, the company now produces revenues of £5.9m and
employs 16 staff. Through its freight and shipping activities, the
company noticed an area of expansion which seemed too good to miss. A
number of its clients were major oil companies and they were involved in
shipping fuel from producers into the UK. They had contacts throughout
the industry, knew how to get goods from A to B and how the industry
worked. Meanwhile, governments across Europe and elsewhere were
setting targets for the use of bio-fuel, and were therefore creating a
market through mandate. So FCL began to research the market and
brought Colin Walker, now managing director of FCL Biofuels, into the
business to help oversee the diversification.

The company came into contact with a Portuguese organisation,

Prio, part of the Martifer Group, which grows rape seed and refines
it into pure bio-fuel. The two businesses got on well and struck up a
partnership, launching FCL into the bio-fuel market. Despite the
downturn, Walker is buoyant about its prospects. “The growth in
bio-fuels has been 100% a year, the market is there and it’s
growing even though there’s a recession,” he says.

The move into green fuels is bolstered by a mandate from the

British government, the Renewable Transport Fuel Obligation (RTFO)
and a European Union (EU) directive, which states that 5.75% of
road transport suppliers’ fuel must be from renewable sources. So
FCL appears to have struck green gold, and Walker is predicting
new revenues of £30m within the next year. FCL is also interested in
other green technologies, such as wind and solar power, potentially
transforming it from a logistics business into an energy company.
How far is too far?

So FCL appears to be on to a good thing, but then it has mitigated a

lot of the risks associated with diversification from the off: the
hiring of Walker; the partnership with the Martifer group and, of
course, the mandated marketplace.

“The best examples of diversification are when it is truly

complementary [to your core business]; it seldom works in a true
sense,” reckons Adrian Mole, of accountancy and business advisers
Mazars, which assists companies that are looking to diversify.

Granby Marketing, led by chief executive Stephen Bentley, has

recently began offering a new service: a dedicated, outsourced call
centre called Granby Talk. The company offered this service as part
of its marketing offering, but felt that it would do better if given its
own identity. “Don’t think that it has to be brand new. If you have
got something strong, build upon that,” says Bentley.

New revenue

The thought of adding a new revenue stream to a business gives

some entrepreneurs a boost and reminds them of the time when
they were starting up. But as you have done it before, it’s worth
reminding yourself of what that entailed and where you made
mistakes. If some of your existing staff were on board at that time,
then you should speak to them about that period, so they can help
you analyse where you can improve this time around.

“One of the benefits of this is that you’ve already got your accounts,
human resources and other departments in place to cope with the
new business,” says Bentley. “You don’t need to put in all the
administration like you do when you’re getting a new business up
and running.”

This is, indeed, one of the major benefits of a diversified business,

but don’t assume that this will automatically be the case. “You need
to work out if the accounting systems are adequate,” Mole cautions,
as you might expect from an accountant. But as recession bites the
UK economy, there’s never been a more important time to ensure
that invoicing, credit controls and payment chasing are in good
order. An advantage of diversifying is that it creates new revenue,
which could off-set the risk to your existing business, but only if the
money is accounted for.

Within an existing customer base there are two ways to boost

revenues: sell more products or expand your range. In a shrinking
economy, the former gets tougher, but the latter can be a key to
survival. You are well advised at this time to be talking to your
customers and finding ways of adding more value, and this could be
the route to finding new revenues.

Rajesh Agrawal is the founder of Rational FX, which operates as a

currency exchange for people looking to make investments
overseas. His diversification idea stemmed mainly from clients that
needed large sums of money to take overseas for property
investment. “Interestingly, in our exchange business, the majority
of our customers are people who are buying property abroad,” he
says. “The way we got our clients was through an affiliate
programme; property developers recommend us to their clients.”

Therefore, Agrawal founded MovebytheSun.com, a website that

helps people find property overseas, a natural expansion to his
existing customer base and an added advantage to his affiliated
partners.

“We already have a relationship with them, they trust us and know
us, so it was a fairly natural decision for us to create
MovebytheSun,” he says. “We fielded the idea and spoke to quite a
few businesses. Then we set up the website and they really liked
the idea, because they trusted our brand.”

Staff issues

Diversification can be an unsettling time for employees if handled

badly. Questions will arise such as: What does this mean for me?
Will my job change? Is the old business going to survive? It is best
to stop the rumour mill from churning over before it does any
damage and to see this as an opportunity to boost morale.It is likely
that you have many skill-sets in your company that can be used in
the new business, and, therefore, this is a chance to offer good staff
the chance to progress. You also have the advantage of not having
to hire new people.

“The majority of our staff are experienced enough to handle this

already,” says FCL’s Tesse about the key skill sets that already exist
in his firm to help it cope with its move into bio-fuels.

Granby Talk is also borne out of strong, existing staff, as Bentley

explains: “The call centre we have got has a really low staff attrition
rate; some of the people working there have been with us since we
started eight years ago.”

The new business will also have its own management, offering
further opportunities to its long-serving staff.

Tax scenario

Unsurprisingly, tax is a complex area with respect to diversification.

For example, corporation tax is a key area of concern, especially if
you are planning to establish a new company. The small companies
rate (SCR) means you pay 21% up to £300,000 a year and 29%
thereafter. However, if you are in the higher band and then set up a
second company, you will lose the SCR at £150,000.

Some entrepreneurs prefer to start up their new business within

their existing tax framework. Bentley has done so with Granby Talk,
but is likely to establish it in its own right soon, partly to mitigate
any potential risk. There are advantages to keeping it all under one
roof in terms of offsetting costs, but there are disadvantages too.
Separating companies isn’t always an easy task, and Mole says
that, in some cases, it can take up to six months.
To understand your own position on tax, you’ll need to sit down with
your accountant or finance director.

Words of warning

As mentioned, there are several pitfalls that can hit a diversification,

not to mention the same ones that can hamper any new business.
Mole believes most stem from ignorance or an over-eagerness to
jump in before researching the sector.

“Mostly this happens at a commercial level when the entrepreneur

hasn’t fully understood the business that they are going into. The
classic one is haulage. People think that because they have a fleet
they can become a haulage company without realising the issues
involved and that many hauliers are working on wafer thin
margins,” he warns.

Property development is another area where amateurs buoyed by

rising house prices have rushed in but are now being hit as the
market goes into reverse. An air of caution is generally a good thing
when stepping into new territory. FCL UK has resisted the
temptation to become too gung-ho in its approach, even though the
bio-fuel market is worth an estimated £50bn.

“Consider how many businesses got there early and have already
bowed out. It is only now that the market has been settling down,”
explains Sohi. “We have been keen to keep the business model
quite lean. While the market is in its infancy, it wasn’t wise to bring
in costly experts from an industry that is still evolving.”

Similarly, Agrawal of Rational FX adopted a step-by-step approach

to keeping costs down for the first year. “We got a small team in
India of five people to create the website; there’s a project manager
in London and two people on sales and marketing,” he explains. “We
did it at minimum cost, because we didn’t want it to get in the way
of us making money.”

Reputation management

As an existing business, you have a place in the market where your

name and reputation are of paramount importance. So there’s a risk
that diversifying into a new area could negatively impact on your
corporate image. Bentley spent a significant amount of time
considering the market before launching Granby Talk. He also had
faith in his call-centre staff and had received positive feedback from
clients that had used his service. But the new business isn’t being
looked upon as a cross-selling opportunity, instead being marketed
and promoted at new customers. Although diversification can be
beneficial in terms of cross-selling, there’s risk involved in this
approach.

“My advice is to think carefully about the cost to your brand in

terms of its development. You need to ask yourself how
diversification will affect it,” Bentley warns.

Similarly, FCL weighed up the risks to its business before moving

into the field of renewable energy and bio-fuels: “To use the FCL
name in a new field was quite a risk, but it was a premeditated and
calculated one. If you are a source provider and you source crops,
then there’s not much chance of it going wrong,” says Sohi. “Also, I
think it will leverage back to the logistics business, helping us to
present FCL UK as environmentally friendly.”

Striking gold

There are many examples of good diversifications and sometimes

these new revenue streams end up bringing in more than the
original business. Perhaps this is not surprising; the entrepreneur
has had the chance to learn from his or her mistakes and found
other key players and partners that can help to realise a new and
exciting dream.

All of the successful businesses here have spent time researching

and planning their next phase – highly advisable as a botched effort
can wreck your bottom line and reputation. Also, extreme forms of
diversification are rare. Most stem from, or are complementary to,
the existing business. So have you got a goldmine staring you in
the face?

Diversification across the

generations
In 2000, Oliver and Ben Black bought a bankrupt chain of seven
childcare agencies supplying nannies and carers for nurseries.Tinies
has since grown to become the UK’s largest childcare agency with
25 branches.

Continuing in this vein, the brothers started

emergencychildcare.co.uk a website that enables parents to book
emergency childcare cover at the last minute. Corporate clients
such as Barclays Capital, the Metropolitan Police and IBM took to
the online business, offering it to their staff as a work benefit.
However, a further diversification was to follow.

Many staff at companies don’t just have children to worry about,

but also have elderly parents that require care too. IBM specifically
requested the service and My Family Care, as it is now known,
started up to offer services for this age bracket too.

“Moving into new areas is relatively easy because it is fun and it’s
growing. What’s more, you can carry along people with you,”
explains Black. “It’s like dating a girl, the first month is always the
most exciting.”

Early steps to take

There are a number of common sense, yet vital, steps that you
must take if your business is to expand into another realm:

Insurance often gets overlooked. Your policies cover your existing

business, but don’t assume this will be the case for your new one. A
chat with your broker or insurer is time well spent to make sure
that the basics, such as public liability, are sufficiently covered.
Ensure your tenancy agreement isn’t so stringently worded that it
prevents certain activities from taking place on site. For most office-
based functions, this is unlikely to be a problem, but some
diversifications that involve machinery or vehicles could potentially
be a breach of contract.
Don’t forget the taxman. Unless you are establishing a new
company there isn’t much the Revenue needs to know, but it likes
to be informed, especially if there’s likely to be any major change in
your data. As always with the taxman it’s best to tell him before he
comes asking not afterwards.