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 when the current business model can no longer keep up, processes struggle to fulfill customer demands and employees are stretched to the limit. Leaders must scale the business to ensure the required pace is met, while also providing building blocks for the company's future.
Here are five key points business owners and managers should consider to help ensure a successful scale up:
Don’t underestimate the preplanning 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, capitalizing on technology and choosing the right partners with whom to work.
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 who's a good leader, but also having a strong board with the depth of experience and independence to underpin a strategy and challenge ideas when necessary.
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 buyout or via an initial public offering (IPO).
The funding option often will depend on the owners' personal circumstances, the size and ambition of the company and its projected cash flows. For example, private equity or management buyouts can work well when plans to expand involve the owners exiting the business or stepping back considerably. However, you need to have a realistic idea of the level of equity you're willing to relinquish, or the debt repayment burden you're prepared to asuime to achieve the required funding.
Another vital consideration when looking to raise funds from an external investor is to partner with one that's fully aligned with your objectives, and vice versa. Investor relationships can become strained due to misaligned goals when the future strategy hasn't been clearly understood or communicated.
Should you go for a market listing?
While a market listing comes with a significant initial expense, it offers additional flexibility in terms of ease-of-access to further capital and doesn't carry future repayment burdens. It also grants the current shareholders, perhaps inclusive of original founders and employees alike, the freedom to realize the value of the business through the liquidity of their shares.
Privately-owned 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 elevated profile also open 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 isn't always the best option due to a lack of experience with external communications.
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's participation from international shareholders. Considering the additional time constraints, it's important that appropriate levels of support are in place to ensure operational targets are met and the rigor of the business doesn't 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’ growth journey.
Is your strategy sustainable?
Business expansion plans and the scaling of operations often happen over time, and the steps to support growth are incremental. Regardless of whether the process occurs organically or via formal 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 appropriate 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 phase can be both exciting and stressful, the phase also marks a pivotal step in a company’s life cycle; signaling that management anticipates an upward trajectory and future success. By having clear goals, as well as considering all funding options and creating the right support, businesses can improve their chances of successfully navigating the challenges involved in scaling.
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