Not every small firm will want to grow as big as it can. But for those that do, it can be a treacherous journey, and one that will require significant change for founders. Christian Doherty explores the challenges of moving beyond the start-up stage.
A recent FSB report, Wales’ Missing Middle, revealed that while, in general, micro-business and large corporate sectors have flourished during the past 15 years, businesses that lie between those two ends of the spectrum have fared less well, lagging behind in growth rates. For Wales, read the UK as a whole; the growth in firms employing 10-200 people has failed to keep pace with those at either end of the size scale.
This is partly an issue of finance. According to FSB’s most recent Small Business Index (SBI) data, 42 per cent of small business owners say credit availability is very poor (19 per cent) or quite poor (23 per cent). Just 24 per cent feel credit is readily available. These numbers improved between 2012 and 2016, but have weakened in the last two years.
However, there is more to it than simply a lack of funds. For those keen to escape the trappings of the start-up world, shifts in working practices, business systems and mentality are also required.
The ‘mid market’ is a hard place to find on a map, but broadly speaking it would cover any business employing between 10 and 150 people, with a turnover of £1 million or over. As businesses develop, they inevitably begin to run into a set of new challenges that test their owners in ways they haven’t experienced at the embryonic stage: the emphasis switches from accelerating to consolidating growth; owner-managers must relinquish absolute control over day-to-day operations; and systems and processes that work for a start-up may become dangerously stretched.
So how do you know when you’re ready to step up to the next level, and how can you make the journey easier? “There’s no lightbulb moment when you realise you’re not a start-up any more,” says Tim Barnett, sales director at South Wales education provider Educ8. “In my experience, it slowly dawned around two and half years in. We had moved premises and you do stop and think, ‘I remember when it was the three of us in a room’.” At that point, it soon became clear that the business needed to change – and quickly. “You can grow from zero to £6 million quite straightforwardly – you know all the clients and your gut feel sees you through,” Mr Barnett says. “And, of course, once you get to £12-14 million you’re a small corporate with all the systems and processes in places to run it efficiently. It’s the bit in between that’s the challenge.”
For Mr Barnett, the focus was to impose order on chaos. “You’ve got to bring in better systems and processes. It’s unavoidable, and it can be expensive,” he warns. “You could be turning over £6 million on a really high gross profit and then at £8 million the gross profit falls off a cliff because of the cost of investing in the right systems and processes. You almost have to take a step back in order to go forward.”
Those systems, he argues – particularly those which track and measure employee activity – are critical to understanding what’s under the bonnet of the business. “You can get away with not having a customer relationship management system when you’re a £5 million business, but £10 million? No way. So it can be tough to manage not just the tech, but the human factor too. They can put some noses out of joint but you need to collect data, because it belongs to you.”
Nick Bettes, a change consultant and author of Unchain Your Business: How to let go and grow, works with owners of small businesses struggling to reach the next level. He agrees that surviving as a mid-market firm requires as much organisation as inspiration.
“You really need a resilient, reliable management routine that works on a daily, monthly and annual cycle,” he says. “If you assume that most businesses have something that people want to buy, that’s 10 per cent of it. The other 90 per cent is about being organised, and the people that make the transition to the next stage well are the most organised.”
Mr Bettes points out that the benefits of installing the right governance, accounting and operational systems extend beyond short-term efficiency. “If you want to sell for any serious money then it has to be a viable business when you’re not around,” he adds.
Michael Mealing – a veteran of growing businesses, who currently serves as FSB Employment and Pensions Chair – says reaching the level beyond the start-up stage requires a fundamental shift in mindset. “At some point, the lifestyle of the owner/manager changes and the business becomes more about people and finance, and less about the product or service that it sells.”
The only way to grow successfully, he advises, is to employ managers. “Unless you have a team beneath you, you’ll be dragged into everyday problems,” he says. “You have to be able to delegate.”
In practice, that means identifying those people in the business with the potential to take on more responsibility as you step back to focus on other areas. A recent client of Mr Bettes recognised that need but felt there wasn’t anyone with the necessary talent. “But it was clear he hadn’t been realistic about what he wanted and hadn’t set them the right targets, or taken the time to develop them,” he says.
Mr Bettes worked with the founder to set both a clear long-term vision and realistic short-term targets for his budding managers. Then he introduced a regular monthly meeting, looking to empower his team. “So now he has a team with whom he can have a grown-up conversation about the direction of the business,” he says. “And the time horizon has changed – it can now go beyond the end of the shift or the end of the week. They now sound and look like managers, talking about key performance indicators and how to drive the business forward.
“In a way, he’d made himself redundant: they’re making their own decisions and he is no longer the daily problem-solver,” he adds. “But now he’s talking about expansion or changing product lines – all things that are much more interesting and valuable in the long term.”
Finding a new role
Neil Brown recognises that journey. As Managing Director of Inclusion Housing, he oversaw the company’s growth from a £65,000 profit on a turnover of £4.5 million to turnover of around £30 million with a surplus of £3 million, growing from 400 to 2,400 clients in just three years.
Doing so has forced him to rethink his leadership role from do-er to advisor. “You can stay in touch with the business but also delegate – it is possible,” he says. “You have to find a new role for yourself – now it’s about helping people and looking for new partnerships. You can do that without micromanaging. I still enjoy it a lot.”
Following a manic three years of growth, Mr Brown says he has consciously stepped back from an operational role at the company to focus on stabilising the business. “For me, while I can’t do everything, there is still a lot to do: bringing in more talented people, finding new partnerships or opening new schemes across the country.”
Take it steady
Neil Blockley, Commercial Director at Little Inspirations Day Nursery in South Wales, warns firms that are going for growth not to go too quickly. “We grew really fast, from four to eight sites, taking headcount from 40 to nearer 100, and realised we couldn’t maintain that speed, and we had to pace ourselves,” he says.
As a result, investment in new sites is now followed by a year of consolidation. “Once the sites are bought, we need to fill them with paying customers,” he says. “We need cashflow to refill the coffers, maximising what we’ve got so we can go again. You can’t keep running at the same speed. You need to give the banks a breather too – show them the return on their lending and go again.”
Knowing when to ease off is crucial, Mr Blockley believes, especially once deal opportunities begin to consistently pop up. “Businesses don’t fail because opportunities don’t present themselves: they fail because they run out of cash. It’s surprising how quickly you can get squeezed on cash after a big investment – payroll seems to come around quicker every month.”
Senior leaders also need a break. “As directors who may not have taken dividends during the growth push, you might want a year off that to take some comfort from the business.”
FSB Funding Platform can help members get the funding they need to take their business to the next level. For more information visit www.fsb.org.uk/benefits
Buying your way to growth
Alex Parr has been with translation agency Wolfestone for a decade, during which time the company has gone from an actual back bedroom to a modern office in Swansea. She hopes the company’s current turnover of £4 million will reach somewhere around £5.5 million on the back of an acquisition it plans to complete this year.
It’s the second company Wolfestone has acquired, and Ms Parr says both deals have been instrumental in stabilising the company and reaching a new
level of maturity.
“We moved into our new offices three years ago, and that gave us confidence to go beyond start-up status and do something we wouldn’t otherwise have tried: going after an acquisition,” she says. “We proactively pursued that in order to grow service levels and increase market share.
“We have run up against a common obstacle blocking growth: there are just not enough skilled people to support the business,” she adds. “That has created a situation where we must look beyond our own backyard to get the right quality staff in. So we are now looking to acquire a business in north-west England, because the pool of talent is bigger and that’s what we need.”
Accessing funding for acquisitions can be difficult, she adds, but small firms do have one bargaining chip. “You can offer to move accounts to a new bank if they can help with finance,” she says. “And that’s exactly what we did. Luckily it went smoothly and we got a great deal.
“The banks were really impressed and we’ve never had a problem supporting that debt. And if you can do that first time, for the next deal they’ll be more open to support you. Just because one bank says no, don’t think every bank will follow suit.”