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 generationsIn 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 takeThere 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.