Rapid growth is impressive, not least because it can be hard to sustain.
Dale Williams, Partner at BPE Solicitors, looks at the kind of support scale-ups might need for ongoing success.
To achieve fast and significant growth is challenging, but there is a small seam of such scale-ups throughout the UK. The Scaleup Institute defines a scale-up as an SME which has reported turnover growth of more than 20 per cent over three consecutive years.
Dynamic young firms may grab the headlines, but established businesses shouldn’t be ignored. The Scaleup Institute found that 43 per cent of scaleups are more than 20 years old, and the fastest growth rates (more than 80 per cent a year) tend to be among those in the 10-15 year age bracket.
At BPE we refer to these as ‘Seasoned Scale-ups’. These stalwarts of our economy tend to approach growth in a different way to younger SMEs, which means the advice we give and how we work with them differs too. Having advised clients at every stage of their life-cycle, here are five observations that aspiring scale-ups may find useful, whatever the age of the business.
1) Track Records Build Trust
To achieve scale-up businesses will, in the vast majority of cases, need funding. This will drive growth, either organically or by acquisition. Bank finance can be harder to achieve for start-ups and younger businesses so they will frequently look at angel investors (using the EIS tax break in many instances).
Private equity investment or low-level bank finance, or a mixture of the two, will also be considered but to a lesser extent. This takes time, as whoever is lending money will want to go through a form of due diligence to make sure they are happy that the initial impression of the business is a true reflection of its situation. Younger businesses often discover that fundraising takes longer than they had anticipated.
Delays can cause issues for a rapidly growing business. Anticipating that can head-off some potential problems. Angel investors, private equity investors and, to a lesser extent, finance institutions, buy into the individuals as much as the businesses so it takes time for them to become comfortable with the people, their drive and skillset.
One reason crowdfunding has become popular in recent years is that it is seen as a way of bypassing that process, albeit it’s not guaranteed to be fast.
“One of the reasons crowdfunding has become popular in recent years is that it is seen as a way of bypassing that process, albeit it’s not guaranteed to be fast”
Seasoned scale-ups will typically secure funding through bank finance, or through larger private equity injections of cash.
Banks will normally look for some form of security against property, or debt finance whereas private equity will often look for an equity stake in the business itself. This means the sources of finance are significantly different. Private equity will tend to have a three to five year window in which the investor wishes to exit (either through the sale of a business as a whole, or by re-finance of private equity interest out of the business), whereas bank finance is paid off over time, or can be rolled over.
Crowdfunding remains a potential possibility in this instance as well, although it’s less common for more seasoned businesses to use it. Angel investment or further investment from existing shareholders can be other options.
As solicitors, our role for both newer businesses and seasoned scale-ups is to advise on the various finance documents and to assist a client through the due diligence process. Frequently we will do this hand-in-hand with the corporate finance accountants who are an important part of the jigsaw. The due diligence process involves lawyers with various different skillsets from corporate to commercial, employment and property, ensuring all the necessary information and risk is understood, cross-referenced and reported accurately to potential investors.
2) The Cultural Impact of Growth
Any business experiencing rapid growth, needs to give careful consideration to the impact on everyone who interacts with the business. This include employees, suppliers and sub-contractors. A strong culture is hugely important to provide reassurance and focus as the business accelerates forward.
Keeping hold of talent is part of this. Key people must be retained and the money invested in training recouped by the retention of those people, rather than being tempted away by a competitor. A positive culture plays a big part in the retention of staff – some analysts say more so than pay. This can also make third parties who interact with the business more willing to engage on favourable terms or, at least, their view of the business will be positive.
3) Taking Stock
After any period of rapid growth, it is often worth pausing to look back and assess where the business is. It’s vital that the correct infrastructure is in place behind the growth, so that it is built on a solid, sustainable foundation. Sometimes rapid growth can hide potential issues, but these can be addressed if appreciated in time. While confidence can be high in the short-term, the edges can start to fray unless care is taken.
But rapid growth is not for everyone. Some businesses are content to grow more steadily.
4) Strengthening your Negotiating Position
One issue that can arise with rapid growth is property; as the business grows, it requires more space.
Younger businesses will usually be required to give more in terms of security than a more established business which has a stronger financial covenant with which a landlord might feel more comfortable. Younger businesses can also find the owners/directors having to give personal guarantees or being asked for a deposit deed. As lawyers, we can assist clients by discussing the various alternatives and the risks involved with each of them.
5) Attitudes to Risk
The most common factor in any business growth journey is risk. The business owner’s appetite for risk dictates, in most circumstances, the speed of growth. Rapid growth is frequently associated with higher risk, primarily for the reasons of the right foundations being in place, as referenced above. Older businesses tend to be more focused and aware of potential pitfalls, but that is not always the case.
While the growth journey for every business will differ, there are key patterns that we can observe from young and seasoned scale-ups. It’s this rich experience that we aim to bring to every client, as legal advisers for enterprising and ambitious organisations.