What Does Scalability Mean?
Scalability, in the context of buying and selling a business, refers to a company's ability to add significant revenue and not be constrained by its own structure and resources. When a company can quickly "scale up," it usually means it has the management, documented processes, information systems, and standard operating procedures to manage its own growth. Most private companies often hit a revenue ceiling because they are too dependent on the owner and simply have not been built to scale up.
Divestopedia Explains Scalability
High scalability is sometimes said to be the holy grail for businesses. Scalability in a private company takes time since it requires a philosophical change that moves the business from being "founder driven" to "process driven." When a company is scalable, it often commands a valuation premium against its peers.
Some of the elements that make a company scalable include:
- The establishment of senior management, including a CEO, COO and CFO to provide the company with strategic and financial direction;
- The establishment of a unified brand across all divisions, services and geographies;
- One information system that provides key performance indicators for managing the entire business;
- Properly documented standard operating procedures and administrative procedures;
- Coordinated planning including operating and capital budgeting throughout all divisions, services and geographies;
- Standard marketing programs and defined lead generation activities;
- Company-wide programs such as procurement to generate savings and economies of scale; and
- A legal structure that is conducive to doing business in multiple jurisdictions, states and countries.