All successful business owners want to see their businesses grow – even if the level of growth is only keeping pace with their sector as a whole.
But business growth can be achieved through different routes and at different rates; what’s important for business leaders is to decide on the most appropriate growth strategy for your businesses, one that takes into account your long-term business aims, your market, and the challenges you may face along the way.
Our current observation is that there are broadly three types of businesses seeking growth.
The first group are concentrating on growing organically by focusing on what they know and the relationships they already have. Their growth comes mainly through selling more to existing customers, or by extending their existing customer base or product offering.
In terms of sheer numbers of growing businesses, the vast majority fall into this group. Although, at times, it can be harder to exit these businesses at a premium (unless their fundamentals or position in the market is special in the eyes of a buyer), those businesses that sustain an above market-rate level of growth can be very exciting to be part of.
The right company can attract buyers and investors and become a ‘platform’ to build a powerful, profitable group of companies.
Big but not agile?
The second group of growing businesses have what we regard as ‘flat’ growth – effectively growing at the same rate as their sector average, rather than outstripping their peers in the market.
In the current climate these businesses are often actively looking at acquisitions while debt is cheap and equity investors are sitting on more cash than usual. These businesses often have scale but don’t have the agility or execution ability to grow at a faster rate than their peers.
They may face a variety of internal challenges, from struggling to retain the imagination of ambitious staff and directors, to intergenerational succession difficulties, working capital challenges, and pressure from external or institutional shareholders who want more growth.
However, these businesses often perform consistently well, make enough of a profit to keep the owners relatively happy, and have an established (rather than volatile) position in the marketplace.
Best of both worlds
The third group, which includes a number of our clients and probably Price Bailey ourselves, are able to combine the best features of the two groups above. They are growing organically by doing what they know and are now ready to start taking more risk than the first group by expanding beyond the traditional horizons of their peers.
They are also able to look seriously at acquisitions but, unlike the second group, don’t need to do them to sustain their place in the market. Combined this means they can use their resources – in particular their capital – and deploy them in a wider range of strategic options with fewer natural constraints to the first two groups, in order to generate stronger returns for shareholders and extend their position in the marketplace.
A question of capital
A key element that needs to be taken into account in these considerations is capital. Capital is essentially the cash fuel that powers a business and it comes, broadly, from three sources – debt, equity (such as shareholders reinvesting, private equity/venture capital, or a Stock Exchange flotation), and reinvesting your own profits.
One of the challenges we have observed recently is that businesses often mismatch the type of capital they use to fund their decisions on growth. This leads to a variety of problems, ranging from running out of cash through to being too conservative to make necessary decisions. The best businesses know what capital to put at risk for each growth strategy and have detailed plans, evidence and thinking behind this; the outcome of which is a well-considered plan to engineer stronger returns to shareholders.
Interestingly, we have also seen a growing numbers of businesses who, rather than investing solely through debt, will be more interested in investing their surplus profits or even going to investment funds to secure more equity investment if the growth ambitions are very strong.
We know there is currently a lot of cash sitting in private equity funds which is not being deployed because they don’t see enough quality business opportunities. It’s a bit of a Catch-22 situation. A lot of investment funds would be keen to invest in that third group of businesses, but because those businesses are growing so well, they don’t need to take on new equity, which would dilute ownership. So the funds are then often looking at the second group of businesses – those who need the capital to grow – but fewer of these businesses are attractive to the investment funds.
Ultimately, there is a lot of cash out there that is available to be invested in exchange for shares in businesses with strong prospects, and there’s some cash out there to be invested in relatively cheap debt; but growth largely fuelled by reinvesting retained profit is proving to be the most popular option for the best companies who want to be masters of their own destiny.
This is great for the economy, as there is an emerging cadre of British businesses looking to boost productivity and performance by reinvesting their own cash rather than taking it out as a dividend or leaving it sitting on the balance sheet of the company. It’s analogous to fixing the roof (with your own cash rather than someone else’s) while the sun shines.
There is a lot of growth opportunity out there for management teams who know how to use and deploy capital successfully in order to create greater shareholder value. Price Bailey can offer that planning advice, strategic input and deal execution capability to companies of all sizes and in all sectors. We take on projects all around the world for UK businesses that are looking to expand either overseas or domestically, and for international corporates in the US, Middle East, Africa, China and beyond, looking to acquire or invest in business interests in the UK.
To find out more about developing a growth strategy for your business, contact Chand Chudasama, Price Bailey Strategic Corporate Finance Partner using the form below. You can find out more about Inside the Minds of Business Leaders through our digital report.
We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.