For all the good that growth can deliver, many medium-sized businesses come to a point where it can begin to negatively impact processes, management and employees.
It’s the point where the current business model can no longer keep up, processes struggle to fulfil customer demands and employees are stretched to the limit. Leaders must scale the business to ensure the required pace is met, whilst also providing the building blocks for the future of the company.
There are five key points business owners and managers should consider when ensuring a successful scale up:
1. Don’t underestimate the pre-planning stage
Many businesses struggle to find enough time to plan a clear strategy for growth. Taking time to create a strategy capable of scaling a business will not only mean reviewing funding options but also solving staffing issues, managing system and infrastructure upgrades, capitalising on technology, and choosing the right partners to work with.
One of the first steps is to ensure the best management team and suitable governance frameworks are in place. This not only means having a chief executive that is a good leader, but also having a strong board that has the depth of experience and independence to underpin a strategy and challenge ideas when necessary.
2. Assess finance options carefully
Raising funds to scale a business can involve several options. These include raising external debt, securing investment from private equity, a management buy-out or via an initial public offering (IPO).
The funding option will often depend on the personal circumstances of the owners, the size and ambition of the company and its projected cashflows. For example, private equity or management buy-outs can work well when plans to expand involve the owners exiting the business or taking a considerable step back. However, you need to have a realistic idea of the level of equity you are willing to relinquish, or the debt repayment burden you are prepared to take on to achieve the funding required.
Another vital consideration when looking to raise funds from an external investor is to partner with one that is fully aligned with your objectives, and vice versa. Investor relationships can become strained due to misaligned goals where the future strategy has not been clearly understood or communicated.
3. Should you go for a market listing?
While a market listing comes with a significant initial expense, it gives additional flexibility in terms of ease-of-access to further capital and does not carry future repayment burdens. It also grants the current shareholders, perhaps inclusive of original founders and employees alike, the freedom to realise the value of the business through the liquidity of their shares.
Medium-sized businesses also have the option of choosing to list on a smaller growth market as a stepping stone before entering one of the main markets, where the rules are more extensive and carry significant reporting commitments.
This wider shareholder base and the elevated profile also opens the door to branding and publicity potential, particularly if the business is doing well. Equally, this can attract media interest if performance drops below expectations; and the board needs to be prepared for such an outcome. For many businesses, a more open market dialogue is not always the best option due to a lack of experience with external communications.
4. Being accountable requires support
An overlooked aspect of funding is the increased levels of accountability that follow. For example, reporting requirements and regular meetings with external investors, banks or shareholders will become more frequent.
In addition, an IPO often means there is participation from international shareholders. Considering the additional time restraints, it is important that appropriate levels of support are in place to ensure operational targets are met and the rigour of the business does not slip. This may involve a change in the board and management structures to ensure suitable expertise and experience exists for this particular part of your business’s growth journey.
5. Is your strategy sustainable?
Business expansion plans and the scaling of operations often happen over time and the steps to support growth is incremental. Regardless of whether the process occurs organically or via conscious strategic plans, the decision to raise funds to support the journey is significant and demands an extensive due diligence process, and in some cases, regulatory filings. Partnering with the right team of advisors who not only have the suitable experience and expertise but take the time to understand the business and the needs of its owners is also vital for the scale-up process.
While preparations for this next stage can be both exciting and stressful, it also marks a pivotal phase in a company’s lifecycle; signalling that management anticipates an upward trajectory and future success. By having clear goals, as well as considering all funding options and putting the right support in place, businesses can improve their chances of successfully navigating the challenges involved in scaling.
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