The vast majority of UK businesses are small and medium enterprises (SMEs), indeed over 99% of British firms have less than 250 employees. The majority of businesses (75%) employ no one but the owners and only a fraction (0.6%) are mid-sized businesses with 50 staff or more. So while it’s become increasingly fashionable to applaud the efforts of those going it alone, many are frustrated by the lack of growth and jobs created by them. For UK politicians, desperate to alleviate budget and trade deficits, more ambitious fast-growth businesses are what they want.
In 2011 the chancellor, George Osborne, highlighted Germany’s Mittelstand – specialised mid-sized companies which power the nation’s exports and GDP. These predominantly family-owned and manufacturing-focused businesses are the bedrock of German exports and suppliers to large corporations such as BMW, Volkswagen and Siemens. They are also impressive employers providing stable jobs and training during hard economic times. For example, even during the recession of 2008-11 the Mittelstand increased jobs by 1.6%.
But the Mittelstand didn’t appear overnight and is the result of years of careful planning, sizeable government support and a dedication to staff investment, of which apprenticeships and training form just one part. There is no German formula which can be imported into UK business, and much of what underpins the Mittelstand appears at odds with the UK’s service-dominated economy and flexible working culture. If the UK is to have more mid-sized and large companies, entrepreneurs will have to learn to overcome the barriers to growth and that is easier said than done.
Painful step
“It’s the most painful step,” says Lara Morgan, talking about the period when a company grows from small to medium. She is now the chairman of Company Shortcuts, which works with entrepreneurs to grow their businesses, but knows from personal experience the trials and tribulations of going from a sole trader to a fully fledged multi-national.
In 1991, she founded Pacific Direct and the business rapidly grew in the following years, eventually peaking with 476 staff and revenues of £18.5m. Morgan exited in 2008, selling the company for more than £20m, but she says the shift from six staff upwards was the hardest part. “With six people in the office you are starting to lose the ability to have conversations with everyone and judge their moods,” she says. “You go from being the happily all-controlling, dictator of everything, to having to let go and trust other people and that is the scariest part. Suddenly you’ve got to run your business in a more legally defined, professional and structural way. It’s the time when you really need to go on a course and learn about business growth, but you’ve got no time to do it. The reason why so few companies manage to do grow is because it’s so bloody hard.”
Morgan did manage to get herself on a course, joining the Business Growth and Development programme (BGD) at the Cranfield School of Management and learnt the lessons of growth. A natural DIY entrepreneur she had to go against instinct and defer responsibility to managers. A finance director and a non-executive director were brought in to provide oversight, dig into the numbers and ensure the business didn’t run out of cash. “People can make themselves bankrupt because they don’t have the controls in place. If you suddenly need finance, that is the worst time to ask for it. If you haven’t been having a decent conversation with the bank you can get trapped in this pincer movement which can kill a business or keep it small,” says Morgan.
Capital
High growth requires a combination of both management and financial capital. Growth can use up a lot of cash very quickly as additional salaries, costs and outlays dig into cashflow. But without the right management the business can go out of control with employees making decisions contrary to the wishes of the board. However, the issue is complicated further by the fact that good director-level managers don’t come cheap and so hiring them is a risk in itself.
“For a business to grow it really needs a top team. These people need to be good in their own role and focused on where the company should be going,” says Ian Gordon, who runs the Lead 2 Innovate programme at Lancaster University which coaches business owners looking to grow. “Sometimes businesses don’t always employ the best people because they don’t want to spend the money, but also because they don’t want to be challenged by someone in their own organisation.”
Different skills
It takes a certain mindset to start a business, an approach to risk which only the minority of people have. But sometimes those that can start a business aren’t the best at growing them. “Entrepreneurs are often the barrier to growth. They are often risk taking people but these aren’t always the right people to grow a business which can be quite a bureaucratic affair,” says Gordon. “It’s difficult to cross the void, its takes a different set of skills and so entrepreneurs may have to acquire them.”
Pure Growth
Serial entrepreneur Peter Roberts founded PureGym in 2009 and now operates 90 sites across the UK. He employs close to 270 staff and when his gyms reach maturity he expects to bring in revenues of close to £100m. He says you need to get “all your ducks in a row” for fast growth and that it’s best to avoid debt early on. “We started in 2009 and built four gyms in different locations. We had done a lot of research but worked carefully to find out what our mistakes were and what was right. You’ve got to be careful that you don’t pretend that you know all the answers, you’ve got to find out how the consumers react. We discovered the most efficient marketing and sales methods.
“We didn’t put any debt in the business. Our investors were high net-worth individuals – business angels. There’s a lot of them out there that want to help a fledgling business grow. But they want you to get on with it, they don’t want to interfere.
“One of the things we did was to get the people in place before the expansion happened. You always have to make sure you have the right managers in place before the expansion comes through. There’s an element of risk in that but if you don’t then it can all fall over and you can’t manage growth.”
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