It is often said that small businesses are the backbone of the global economy.
Indeed, small to medium enterprises (SME’s) contribute an estimated 44% of global GDP and employ an estimated two-thirds of the world’s workforce.
At the other end of the scale, corporations and Public Limited Companies are worth an estimated $89.5 trillion with a presence that transcends borders, stretching across the world’s stock exchanges.
However, it must be kept in mind that even household names like Coca Cola and Apple started out as small businesses hustling to eke out a place in the marketplace.
It may seem incredible to us now, but even Amazon was quite literally a one-man show operating from a garage just over 2 decades ago.
But how is it that small businesses turn into big businesses, and then in some cases become public limited companies?
Let’s take a look.
What Is a Small Business?
There isn’t exactly an agreed, fixed definition as to what constitutes a small business as there are a whole number of different variables to take into account including turnover, profit, number of employees and market share.
Furthermore, definitions also tend to vary between sectors.
For example, a construction business with a turnover of $30 million is still considered a small business whereas a retail business with a turnover of $30 million would be considered large.
Likewise, there is no neat, one size fits all definition for what constitutes a large business either and this also varies.
How Businesses Grow From Small To Large
Regardless of what sector it is in, in order to progress from an SME into a big business, a company needs to increase its market share, turnover, and profitability.
While there is not enough time to detail all the ways in which businesses can and do achieve this, it usually involves a combination of securing customer retention, cost minimisation and extending market reach.
Extending market reach comes in many forms.
It could involve opening a new (domestic) location, releasing a new product, or repurposing existing products for a fresh market.
Expanding market reach is absolutely crucial for any business to grow although it can also prove very risky.
Opening new locations, increasing production or designing new products requires a lot of investment, increases labour costs and can tie up capital for long periods.
It is not uncommon for small to medium businesses to overstretch themselves during growth periods and while some come through the other side of it, others do not.
Becoming A Publicly Traded Company
Once a big business is successfully established as being profitable, demand for shares in it increases and the business has the option of becoming a publicly traded company.
What this means is that the company is broken down into shares, and these shares are then offered for sale to investors or traders.
There are a number of reasons why a large business may decide to become a publicly traded company.
Firstly, it can be a very powerful way to raise capital for further investment.
Becoming a public company can help to improve a businesses image in both the eyes of the general public, and the chance to prove its credibility and assert its value in the eyes of the financial sector.
Usually, a business decides to “go public” before undertaking significant expansion projects.
There are some drawbacks with going public.
Firstly, when a company sells off its stock it surrenders some control over to shareholders.
Shareholders often have voting rights in a business and can influence its direction as well as make decisions on key appointments.
In some cases, investment firms will buy up large numbers of shares in a company and their voting power can sometimes antagonise directors.
Furthermore, publicly limited companies are also subjected to much closer scrutiny than private companies by both regulators, and the media.
What is a Stock?
According to the Million Dollar Journey guide to how stocks work, a stock is simply a piece of a company and when an investor buys a piece of stock, they buy a share in the company.
That share entitles them to a share of the company’s profits (known as a dividend) as well as various voting rights.
A stock can be sold at any time by the stockholder although the value of a share can go down, as well as up.
For example, if a business posts good profits for a financial year, the value of its stock will increase whereas a business that runs into bad publicity will likely see the value of its stock decrease.
When a company decides to go public or “float” on the stock market, it creates a set number of shares that it wishes to sell and then lists them for sale on a stock exchange.
This is called an IPO or an Initial Offering.
An IPO can offer investors the opportunity to get in on the ground floor and pick up stock at a bargain as many companies see their stock values soar within a few years of going public.
Most companies will be listed on the stock exchange in the country where the businesses head office is registered although in the case of multinational companies, this is not always the case.
The trajectory of every business is different.
Some remain humble forever whereas others blossom into global corporations within a decade.
As we have shown today though, any business that decides to grow has to overcome a number of challenges before it can reap the rewards.