Founders face dilemma over right path to growth

For once, entrepreneurs are agreed. Notoriously a fractious bunch, particularly when it comes to discussing the best way to build a business, founders of small and mid-sized enterprises (SMEs) have reached a broad consensus: the best route to success is to grow organically, rather than through acquisitions.

An informal FT survey of 39 SMEs determined that founders were in favour of not rushing businesses into growing too quickly. Twenty-six said organic growth was more appropriate, with only six favouring acquisitions. Seven said both approaches could work.

History is awash with tales of businesses that expanded too quickly and too far. In 2010, Toyota was plagued by a series of recalls. Akio Toyoda, the president and chief executive, said at the time that he feared “the pace at which we have grown may have been too quick”.

Krispy Kreme, the US doughnut maker, faced similar problems in the mid-2000s, albeit on a smaller scale. According to authors Louis E Boone and David L Kurtz in their book, Contemporary Business, the company “expanded too fast as a result of poor decisions made by management. The company’s near-failure had nothing to do with the quality of its doughnuts. Instead, as the company grew bigger, so did its debt.”

Too much too soon can kill any business. For midsized companies, the question of whether to scale up and grow internationally is pertinent, particularly in the UK. According to Mills & Reeve, the law firm, a third of midsized companies in the UK — which produce a combined £237bn of turnover — are looking to sell.

“Some may want to grow fast, others don’t,” says Patrick Reinmoeller, an associate professor at the Rotterdam School of Management, Erasmus University. “SMEs in Silicon Valley, for example, share the dream of being the next ‘unicorn’ [a start-up valued at more than $1bn] — so growth matters above all. Other SMEs may want to serve local markets with locally sourced things that matter only locally. Ambitions may be limited and acquisitions not an obvious choice.”

The internet has fundamentally altered these considerations, says Sarah Drinkwater, head of Google’s Campus London, a hub for budding entrepreneurs. Being able to trade digitally has rewritten the rule book, she says. “The naysayers will always argue that organic growth is too slow, or the true costs of scaling up are far too excessive. But the fact is the internet is speeding things up and making things cheaper. This is spearheading the rise of the ‘micro-multinational’.

“Ecommerce gives small businesses the power to ramp up their operations incredibly fast, so while they may be small in headcount, they’re supersized in growth, servicing and talent.”

Part of the process of deciding whether or not to move to an acquisition will depend on where the company is in its life cycle. Businesses might indeed have the power to expand their operations, but it is not always appropriate.

Motorclean, which offers car valeting for dealerships, grew organically for 25 years. But a secondary management buyout in 2011 allowed the company to pursue a more assertive strategy, says chief executive Steve McBrierty, “featuring an acquisition that helped us almost double turnover and attain record profits over the next four years”.

Many may favour organic growth but the approach can present a number of difficulties, points out Malcolm Williamson, commercial and enterprise director at Exemplas. A limited amount, or lack, of resources in terms of funding and talent is the main reason, he says. “For example, the cost of marketing for new client acquisition or expanding into new markets can be prohibitively expensive.”

Fundamentally, though, a factor that often comes into play is confidence. “Sometimes,” Mr Williamson says, the business “erroneously believes that purchasing a competitor outright is out of their league”.

There is another route to developing a company: get someone to buy it.

“In this scenario, it’s vital to be clear on why you set up the business in the first place,” argues Rich Preece, vice-president and managing director of Intuit UK, a financial software provider for SMEs.

“Are you a serial entrepreneur, looking to create something, sell for the optimum price and move on to the next project?” Mr Preece asks.

“Is the business your baby, one that bears your fingerprint and one that you never want to let go? Or is there a halfway house — can you retain a salaried senior position in the organisation’s next phase under new ownership?

“Instinct will guide this decision,” Mr Preece says. “But you should reflect on the reason you started the business in the first place and the goals you set out to achieve with it.”