Sam Goodsell, Director
Although most business owners are eager to grow, many of them consider ‘upscaling’ to be risky due to the significant up-front investment needed. However those Businesses who accelerate their growth plans soon realise the significant benefits, such as increased profitability through economies of scale and boosting productivity.
For many small businesses in their early stages leveraging known contacts and continuous growth in referrals, is often sufficient. Although when the time comes for the next step, you need to know how to go about scaling up in order to create lasting rewards for the business and its stakeholders?
1. Timing is crucial
Although there isn’t really a right time, there most definitely can be a wrong time to scale up. While heading for proof of concept, most innovative businesses are self-funded during the early years. Before exploring investment opportunities to scale up the business. The background work should be carried out to make sure the product or service is ready to be launched and go into production. To fully benefit from any early-mover advantages, the time frame in which the business should get to this point, depends on the level of market demand for this specific product or service.
2. Create a plan
To ensure everyone understands where the business is going and when this is happening, a clear strategic growth plan is unmissable as a reference point to the board and the entire team. With continuous market changes, it is important this plan is dynamic and is frequently reviewed in order to stay relevant. For example, if a competitor is causing a significant drop in market share by launching a new product or service, this should probably be avoided, or on the other hand, if new market opportunities open up, the business should try to take advantage of this.
3. Explore the market
Previous experience of selling a specific product or service in a specific market, is not a guarantee for future success. The same outcome may well not be achieved when flooding the market with more of the same or offering the same product or service in a different location. Therefore, assessing market opportunities before investing in diversification is highly recommended. In summary, regardless of what the strategic plan includes, before implementation, an analysis of the target market should be carried out to determine whether there is sufficient market demand.
4. Build the right team
By expanding the business, extra pressure will be created on those who manage it. Early-stage businesses are often founded and run by just one or two people, who besides being passionate about their product or service, may lack skills in some of the other important areas such as, HR, IT and financial management. Therefore, before scaling up, business owners should consider strengthening their existing management team by investing in people with the right skills and market knowledge to facilitate their growth plan.
5. How to attract investors
Although there may be several funding options available for growing businesses, a well presented business plan is essential to attract the right investors. When looking for private equity investment, for instance, investors should be clearly informed on how their funds will be spent and how these investments will realise value when exiting the business in 3 or 5 years’ time. The business plan should also contain several aspects which demonstrate a good preparation and sufficient research of the scaling up opportunity. Elements such as the right tax incentives for investors (EIS and SEIS) and access to experienced non-executive directors, could increase investor confidence and make your business proposition stand out.
6. Focus on productivity
With growth plans in motion, the management team should stay focused on the level of productivity by keeping an eye on chargeable hours, where clients pay on a time spent basis or by fully understanding the production capacity of the business and how much of this is being used. However, in order to grow, the business will need some available excess and thus should not be operating at 100% capacity. For further guidance, please see our recently published report for SMEs in the business sector.
Besides these practical steps, there are some potential pitfalls to be aware of when deciding to scale up. Look out for large contracts which the company is not able to service adequately, as these could be detrimental. Avoid sabotaging future investments by diluting the shareholding ‘too much too soon’ when offering share options to attract talented people. The content of the shareholders’ agreements should also be carefully determined in order to:
- Avoid potential disputes
- Process disputes efficiently if they arise
- Include other wider matters such as a drag and tag clause to allow minority shareholders to ‘take part’ in sale negotiations.
In the end, when considering to scale up, it all comes down to getting the right advice from the start to avoid costly changes along the way, and Menzies have experience to help this happen.