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."