Scaling up: Overcoming the challenges – Investec Comment

Business growth takes many forms, but some companies have the capacity to achieve truly remarkable rates of expansion. They are scaling up: increasing revenues at a rate of over 20 per cent annually for more than a couple of years.

 

This phenomenon is not exclusive to fast-growing markets or sectors. It may be that the company has introduced a product or service that needs to be taken up by everyone in that industry, or that shifting consumer habits call for a dramatic change in an established sector. It can happen through very fast organic growth, or by the acquisition of complementary firms or assets. As a general rule, however, even if a company is trying to expand more quickly through acquisition, it needs an underlying business that is growing at above-average rates. Two companies scaling up which we have worked with recently include TCL Holdings, an external property services firm, and Motor Fuels Group, which is now the biggest independent operator of petrol stations in the UK.

 

Scaling up is difficult. In a stable company, management broadly knows what the unknowns might be and can plan for them. But growing at 20-30 per cent a year makes a fundamental difference to a business. You’ve got to make sure you’re hiring the right people (and a lot of them). You’ve got to stay focused on the profits you’re making and the cash you’re generating as you increase turnover. And you must ensure you have the right customers who will pay at the right time, and that if they don’t you have the right finance to tide you over.

 

Finance more generally needs close attention, particularly if you’re acquiring other companies. If you’re scaling up, traditional high street banks are unlikely to be able to support you: events are likely to move too quickly for them to feel comfortable. Instead, you need a partner who will understand whether you have a compelling reason to borrow more money.

 

Management is crucial, particularly when convincing a finance provider that you have what it takes to scale. Managers need to be dynamic, able to show that they’re not afraid to challenge themselves and push against the status quo. It can also help if management is aligned with the success of the firm in terms of equity holdings.

 

Growing via buying other companies brings further challenges, and there is no one-size-fits-all rule for determining whether the acquisition will be a good fit. It might be complementary, whether geographically (the other company operates in another part of the country) or in terms of business line (it might have the same customers but offer a different product or service). Other acquisitions have advantages in terms of economies of scale, allowing the firm to rationalise accounting functions or get better deals on essential purchases.

 

But whatever route a company decides to take, it’s vital that they scale up with their eyes wide open to the risks and challenges it entails. As you get bigger, it becomes mathematically more difficult to continue to grow at 20 per cent a year. It’s comparatively easy to increase revenues to £12m from £10m in a year, but much harder to make the leap from £100m to £120m. Getting the right support around you is critical.