The move from a small acquisition to a growing enterprise

A limited budget remaining after the purchase of a small business should not hold new owners back from making immediate steps to transform the business into a growing enterprise.

There are many ways that people acquiring a business can grow their organisation without breaking the bank, providing they make sensible decisions and re-invest into the right areas.

First of all, it’s important for us to establish the difference between a small business and a growing business. Small businesses are generally managed and run by their founders, according to a definition from the Confederation of British Industry (CBI). These founders usually hold more experience than the people they have hired and they tend to fund the businesses with their own money and other immediately available funds.

The owners of growing businesses, however, will be more likely to contract in specialists and skilled people who can help to grow the businesses and their expertise. Funding will come from external sources, including venture capitalists.

So how do business owners with limited assets and personal cash to invest ensure their firms have the opportunities to emerge into growing enterprises?

The starting point – buying a troubled business

Making a good decision when buying a business is obviously a great place to start for anyone hoping to develop and expand an acquisition. Targeting an existing but struggling business can be a good approach, particularly if there are assets and goodwill existing in a company that may be facing insolvency.

A strong debtor book can also be a valuable asset to acquire when taking over a struggling business, with monies owed to the firm sometimes offering a solution to initial cashflow problems. Nick Bizley and William Davies, for example, are two businessmen who recently shared their story of growing their small business acquisition with the Financial Times. Davies explained that they founded the business – initially called All Aspects Management Services, which was in a company voluntary arrangement at the time of purchase – with just £13,500. Although the pair considered themselves risk-averse, they did feel confident enough to borrow the money they needed to buy the firm’s assets and goodwill, knowing that the business’s debtor book was worth £50,200. Over time they collected some of the debt owed and paid off the loan within just three months.

Investing in the right staff

For small businesses, retaining key staff is essential. Especially in cases where a large percentage of business comes from a small number of customers. Losing a lynchpin of the company in the early stages of an acquisition can have disastrous consequences.

With skills shortages proving a major concern for many business owners, training can be a worthwhile way to spend money in the early days of a business acquisition. Keeping lines of communication open with staff is important in order for the founders to ensure they remain in tune with staff training needs and general views on the business and any gaps in expertise.


Generating the money for expansion

Although business expansion does cost money it does not have to be expensive, declared the National Chairman of the Federation of Small Business, John Walker. He told the Financial Times: “Businesses don’t start with money. They start with an idea.” This nugget of wisdom is important to remember when faced with the prospect of expanding a business from humble beginnings.

Many founders, during the first year or two of running a growing business, may find that their modest investment starts to hold them back. “Starting a business on a tight budget is possible, but requires a balance between efficiency saving and investing in the right areas,” explained Phil McCabe, a spokesperson from the Forum of Private Business.

It’s easy to reach the point where orders are coming in, but a lack of investment means business has to be turned away or staffing levels are insufficient. This is where invoice factoring can lend a hand.

Invoice factoring, or invoice discounting as it is sometimes called, frees up the cash owed to a business before it is collected from the debtor – allowing small businesses to continue driving growth by using the cash to pay for new equipment, new staff members or simply more space from which to work.

Davies and Bizley explained that they made a “couple of hundred thousand pounds,” from their invoice factoring process, which was spent on larger premises and better equipment. Without this boost their company may have never reached the stage where it could start to move into other markets.



Expanding into new markets

Small business owners often see their profits plateau after they exhaust the growth opportunities within their initial market. By this point, the business should be in the position where it can take on more risk to allow it to move into a new and more lucrative marketplace.

Investing in new staff to expand capacity and expertise, and even considering franchising as an effective way to quickly grow a business into a national enterprise, are both tactics worth considering. Breaching the gap between a small business and a growing one - or even a national one - will take more investment, but in order to get to this point the firm’s turnover will have multiplied from the early days after acquisition.

Bizley and Davies, who rebranded their growing business to aspect.co.uk, explained that their £13,000 initial investment seemed like a fortune at the time, but they were soon seeing the benefits of investing £100,000 in a move that had the possibility of growing their business five-fold.

Acquirers always bring a fresh perspective to the outlook of the purchased company’s prospects. Often, the previous owners have long since become overly focused on the day-to-day operations and have lost the will to re-examine and if necessary, overhaul the company’s strategic and marketing objectives.

Many marketing strategies can be initiated at relatively low cost and sometimes do not require the bought-in service of outside specialists.

Areas that should be examined include:

Existing markets – can these be penetrated further? Can customers be sold additional products from within the current range? Are there new ways of reaching prospects in the existing markets? Have cross-selling opportunities been exploited? In what state are the customer and prospect databases and can these be leveraged further? Can new products be created for these existing customers?
New markets – can the geographic catchment area be extended? Perhaps virtually (online)? Does the firm possess the skills or technology to create new products for existing and new markets?

Other questions to be asked include:

Do you want to innovate or stand still?
Are referrals being harnessed?
Would attendance at trade shows raise the profile of the business and reach out to buyers?
Has franchising been considered?
Are overseas markets worth investigating?
Costs. Are these being contained? Can supplies be sourced elsewhere or better deals struck? Have losing products/service been identified? If so, the products ought to be liquidated and services discontinued.

In conclusion, the early stages of business growth really are all about forming a business plan that allows for expansion without massive or unaffordable investment. With good decision-making and persistent reinvestment growth will materialise organically. Regularly reviewing the opportunities in the market and company cashflow will ensure that when a great chance to expand does appear business owners will feel confident enough to risk greater levels of investment for larger potential turnover and profit.

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