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How to scale up your firm

By Sam Goodsell, Director, Menzies LLP

Before too long, business owners realise that accelerating their growth plans now could bring significant benefits, improving their profitability by allowing them to make economies of scale and boosting productivity. Scaling up now could bring lasting rewards for the business and its stakeholders, but how should they go about it?

Get your timing right

Timing is critical and while there isn’t really a right time to scale up, there could be a wrong time. Most entrepreneurial businesses are self-funded in the early years while they are heading for proof of concept. It is important not to consider seeking investment to scale up the business until the groundwork has been done in terms of making sure the product or service is sell-able and ready to launch or go into production. 

Depending on the strength of market demand for the product or service, it may be necessary to get the business to this position of readiness quickly, to avoid missing out on any early-mover advantage.

Planning is key

Having a carefully considered strategic growth plan is obviously important. This provides a reference point to the board and the whole team if appropriate; ensuring everyone has a shared understanding of where the business is heading and in what timescale. 

This should be a dynamic plan, which is reviewed regularly to ensure it is relevant and to take account of any market changes. For example, if a competitor has launched a new product or service, which is eroding market share, it may be necessary to circumvent this, or if a new market opportunity has opened up, the business could be poised to take advantage.

Check there is demand

Just because your business has been successful in a specific market, selling a specific product or service, it doesn’t necessarily mean the same will apply if it suddenly floods the market with more of the same. Similarly, offering the same product or service in a different location, may not achieve the same outcome. 

Of course, if the plan is to grow the business by investing in diversification, this new market opportunity will need to be sized up carefully at an early stage. In summary, whatever the strategic growth plan looks like, research should be carried out to confirm there is sufficient market demand in the target market, before implementation begins.

Build the right team

Scaling up is bound to place extra pressure on those responsible for managing the business. Depending on the nature of the strategic growth plans, it may be necessary to strengthen the management team by bringing in individuals with the right skills or market knowledge. 

It is quite normal for early-stage businesses to consist of just one or two people, who may have founded the business, and while they have a passion for its proposition, they may lack skills in other important functions such as HR, IT and financial management. Before scaling up, business owners should make sure there are plans in place to invest in the right skills or people to facilitate its growth plans.

Attracting investor interest

Availability of funds is rarely the main problem for growing businesses. However, attracting the interest of investors can be more challenging and it is important to present the business plan in the right way. For example, if the business is seeking private equity investment, it is important to explain clearly how the funds will be spent and when it might be possible for investors to realise value from their investment by exiting the business in three or five years’ time. 

The business plan should contain sufficient detail to demonstrate that the scaling-up opportunity has been well researched and that the right tax incentives for investors – such as EIS and SEIS – are already in place. Having access to experienced non-executive directors can also help to secure investor confidence and help your business proposition to stand out.

Stay focused on productivity

Prior to scaling up and when growth plans are underway, it is important for the management team to stay focused on productivity. This usually involves keeping check of chargeable hours, if clients pay for services on an hourly basis, or having a sound grasp of the production capacity of the business and how much is being used. 

If planning to grow, the business should not be operating at 100 per cent capacity, as there needs to be some excess available. For specific guidance on driving productivity, Menzies LLP has recently published a report for SMEs in the business services sector.

Be aware of dangers

As well as following these practical steps, business owners should be aware of the potential pitfalls when scaling up. Agreeing large contracts that the company cannot service adequately will be detrimental. Offering share options to attract talented or experienced people into the business can be an effective strategy, but it is important to avoid diluting the shareholding too much too soon, as this could put off future investors. Shareholders’ agreements also need to be carefully worded at the outset, to avoid potential disputes and ensure they are dealt with efficiently if they arise. 

It can also be wise to consider other wider matters such as a drag and tag clause, which allow minority shareholders to ‘take part’ in sale negotiations. In general, it is better and more cost effective for business owners to seek professional advice at the start of the scaling-up process to avoid costly changes along the way.