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Evaluating a business diversification proposal

Assessing the merit of diversifying into a different business

The Challenge:  The Client operates a successful fish processing and retailing business in a busy seaside town which is a significant tourist destination.  A building had become available adjacent to the client’s existing premises and they wished to explore the concept of diversifying into opening a seafood restaurant or delicatessen in those premises, capitalising on the huge visitor footfall and revenues.

 

What we did:  Over four sessions we looked at the client's existing business and the proposed business and assessed them from a number of angles including

  • The time and costs of diversifying into a new business in which they had no experience, the projected revenues and profitability
  • What could be achieved by further investment into the existing business instead and the potential impact on current revenues and profitability.
  • The practical and financial implications of running two businesses on differing business hours, operating costs and skillsets required.

 

The outcome:  The Client was able to take a step back from the existing business and take the time to look at what opportunities could be explored if more investment was made into it.  This was compared to the costs and projected return if the investment was diverted into the new delicatessen / restaurant proposal.  On balance, the client decided that the return would be higher and they would get better results by focussing investment in the current business.

 

The Benefit:  The client was not unnaturally disappointed that a dream of opening a restaurant / deli wasn’t as economically attractive as investing to expand and consolidate the existing business. However, they were able to see that given their lack of experience in the industry, which has notoriously low profit margins, that at that time it was wiser to invest available cash into the already profitable existing business and expand some of the product lines and services they already had.