The business life cycle – supporting you every step of the way
Richard Cobb discusses the four key turning points in the business lifecycle, and how seeing the big picture and understanding which step you are on can help the planning process, and get you ready for turning the next corner.
Business life is a journey, not a destination. Just as some entrepreneurs are starting their journey, others who have already gone round once may be willing to invest time and money in the next big thing.
There are around 350,000 new business start-ups in the UK each year and, while many can fail, various Government initiatives and reforms have helped drive the entrepreneurship desire. For example, the number of ‘silver start-ups’ is growing – people over 50 are starting more businesses than ever before (even more than the under 30s), fuelled by the lump sums now available under recent pension reforms.
Understanding business codes of practice, laws and regulations when starting a new business is vital. Key steps in the start-up phase beyond the big idea include; raising finance from friends, family, business angels and grants (and pensions), creating and protecting intellectual property (IP) and forming and securing a team. When funds and resources are scarce, it is vital to prioritise elements that really form the foundation of a successful business, such as a sensible shareholders agreement, employment contracts and IP protection. Tax planning is another key element - especially as various tax incentives such as EIS, and R&D tax credits can be easily overlooked or lost. For the over 55s, borrowing against a pension pot rather than drawing down the cash itself should also be considered to save income tax.
While there will always be risk and uncertainties in starting up a business, it is critical to get the legal foundations right at this stage to ensure you avoid any issues in the future.
Scale-up and beyond
This is the key stage of a business destined to grow beyond a handful of employees, leading to sustainable profitability. The Scale Up Institute defines a scale-up as having more than ten employees, with average growth in employees or turnover of more than 20% per year over a three-year period. There are currently around 9,000 scale-ups in the UK. A great report by the leading university spin-out group, SetSquared, identified the different needs of scale-ups over start-ups. Staff numbers grow to a level where real management, often multi-site, is required, and more specialist positions replace the multi-tasking roles typical of the start-up phase. All the machinery (sometimes literally) required to make profits is needed here, and the risks and costs of doing business are multiplied.
Moving from early adopter customers to mass market growth, with the more complex sales cycle, and supply chain involved, is another big step – when sales forecasts, which supported investment, are really tested. Growth capital, bank lending, employee incentives such as EMI Option Schemes or LTIPs, acquisitions, international expansion and, potential commercial disputes, figure in this stage. Corporate governance becomes important and an eye on succession planning is recommended.
This stage, and beyond scale-up to maturity, can last years (even generations) and always has its ups and downs, (and requirements for legal advice!) many unpredictable. Equally, in 2017 over 50 IPO exits were from enterprises under five years old (Source – Barclays Entrepreneurs Index) so this stage can be shorter than you think for a high growth business.
Partial exit corner
Although business owners do occasionally get approached ‘out of the blue’ to sell-up, for most shareholders there is a stage where good succession planning leads to a partial exit. This can be a sale of less than 100% of the shares, or a sale of all the shares, but with deferred consideration that pays the cash later, such as the vendor loan notes usually used in an MBO. I would put an IPO on this corner as well – most require ‘Sellers’ to hold on to the newly listed shares for a year or two and, after that, it is still hard to sell a large stake without participating in a full PLC takeover. Professional advice will help negotiate this important corner.
Exit and reinvestment
Eventually the loan notes are repaid, the IPO shares can be sold, or out of the blue a buyer turns up - though none of these outcomes is guaranteed! Fully and finally converting an investment in a trading business into liquid cash gives huge opportunity to spread future risk and realise other personal ambitions. Once immediate and family needs are properly secured, and vital steps such as updating wills have been taken, if there are still funds available, it may be time to explore reinvesting in high risk/reward assets. Shares in early stage companies where SEIS or EIS relief is available to act as an additional incentive might be appropriate. Or you may prefer to let your pensions or financial advisors pick funds or investments which cover this essential area of the economy.
This is also a time to consider developing within the family a ‘philosophy’ around the management of wealth. Discussing the next generation rules of engagement can help ensure a shared approach towards the transition of the wealth when the time comes, and avoid future misunderstandings. We can help clients set-up bespoke trusts and family investment companies to manage their own investments, or introduce them to family office advisers.
We never know exactly what is around the corner, but hopefully this article will help you assess roughly where you are and where you hope to get to, highlighting some of the key steps on the way, should you choose to take them.
For further information please contact Richard Cobb.