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Clear thinking's a must

Lucy Armstrong, chief executive of The Alchemists, considers the options for growing a business during turbulent times

The past year has seen many businesses threatened by the Chinese curse of living in “interesting times”. Whatever description is used - be it credit crunch, recession, depression or meltdown - it has not been an easy time to run a business. And the coming year will be just as challenging.

Whatever the word of the month is, there is no substitute for clear, dispassionate thinking and a robust strategy to drive the business forward.The “do nothing” option and a hope for things to return to “normal” is not a strategy for success.

Older heads have been through turbulent times before: from the oil crisis in the 1970s to the dotcom boom in the 1990s. Looking back, it is easy to level the criticism that too many people, including funders who should have known better, were carried along on the tide of euphoria and believed the new dotcom business models were sound. 

Did those business plans ever really add up to a sustainable business? If a traditional business had presented a similar model, their request for funding would almost certainly have been turned down.

In today’s turbulent market, it is vital that entrepreneurs have an honest, thorough understanding of their business and rigorous, realistic business plans. 

They need to establish what makes them special and why stakeholders will want to continue doing business with them, either as customers, suppliers or indeed employees. 

It is then possible to analyse what the business will need for the future in terms of research, production, new product development, export opportunities and partnerships. This requires foresight and an ability to accept that change is continuous. 

Successful entrepreneurs who are helping their business grow will also need to be able to change their own relationship with the business. They will face the difficult emotional transition of moving from being a control freak to becoming a controls freak. 

They will have systems for managing cash, stock and credit etc, but they still use their staff and their ability to come up with ideas and innovate solutions. Their business will need all the talent motivated and working together. 

Tomorrow’s entrepreneurs must be able to move towards working on the business, not in the business. This is a deceptively subtle difference, but one which marks a significant change in the relationship between the entrepreneur and the growing business.

Entrepreneurs who are serious about growing their business also need to change the way they regard professional advisers. Entrepreneurs should not concentrate on the cost of the advice but rather, should focus on the value of the advice to the business.

With these elements in place, a business will find it easier to raise finance to fund a successful future. One reason why some businesses are already struggling is the amount of debt they already have. 

Banks are to likely to be reluctant to give new credit, and when businesses are renewing their credit arrangements they may find the conditions change. 

This renewed caution from banks is forecast to continue for at least two years, but there are signs that they will be put under pressure by the Government to take a more favourable attitude to business. 

So a good relationship with the bank and the ability to be a controls freak will be essential components for survival, but not necessarily for growth.

Keeping it in the family
Another traditional source of finance for funding growth is from members of the family. As a judge of a nationwide business competition, I have cause to examine the inner workings of several established and successful family businesses from across the UK. 

Many of the companies The Alchemists works with are family businesses. Here the challenge is to manage the “join” between the family and the business.

The most successful ones are those where the family adds value to the business – and the business adds value to the family. One of the defining characteristics of a family business is the way family emotions, loyalty and passion all add a unique ingredient to the mix. 

Employees, managers and shareholders alike talk about the culture of a family business, the ethos set down by the founder and upheld by subsequent generations of shareholders. 

Family shareholders talk of being custodians rather than owners of a business. This, I believe, is an invaluable element. It is what makes family businesses distinctive and successful. 

Long established family businesses with disparate shareholders often introduce a family constitution and council as mechanisms for regulating how the family relates to the business and how the family relates to one another on business matters. 

This formalised structure ensures the source of family wealth – the business – is protected from possible family conflicts, yet benefits from family commitment and custodianship. 

Similarly the family is able to benefit from its involvement with the business. It becomes a focal point for family activity, a source of pride and the crucible within which the family ethos is fostered and developed.

For those businesses with existing shareholders, there is the possibility of raising additional funding from them. They already know your business and are supporting your plans and long term future. 

However, they are not immune to the pressures of the prevailing economic climate and will need reassurance that further investment is in their interests, too. 

Going with private equity
Many businesses in this region are suspicious about private equity but, in fact, it is a valuable source of both finance and business advice. Indeed, both John Moulton, founder of Alchemy Partners, and Simon Walker, chief executive of The British Private Equity and Venture Capital Association, argue that this is the best model for businesses in the current climate. 

According to Simon Walker: “In a world where banks have stopped lending, private equity is one of the few sources of long-term capital around.”

Private equity investors provide finance for businesses that can demonstrate their potential for growth, so that they in turn can generate the returns expected by their own investors. 

These aims sound compatible in theory, but success is only achieved after a lot of hard work by both sides to get to know and understand each other. Private equity is not just about providing a source of finance. 

The private equity firms also provide strategic support to help companies develop and grow. The strength of the company’s own business plan is a criterion that will be scrutinised before any investment takes place, but the most important factor is management team. 

A private equity investor will take a long term view, but his investment is not only financial, but also one of time and effort.

Talking with Angels
Business Angels, wealthy individuals who invest on their own or as part of a syndicate, can also provide finance for a business. The majority of Business Angels usually make investments for financial reasons; they do, however, bring their skills, experience and often contacts to help the business too.

Here in the North East there are regional funds and resources, such as Northern Venture Managers, Hotspur, NorthStar Equity Investors and Finance Tree. One North East can signpost businesses to local funds and government aid that is available.

If the funding is to succeed, business must focus on the people and use all the expertise available, whether in the form of non-executive directors or private equity investors.

Securing the money is the beginning not the end of the relationship with the investor.

Managers and investors should see themselves as equals. The investor provides the finance to fuel business growth; the management team drives that growth. They depend on each other – and the success of the company depends on them both. 

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