The term ‘corporate finance’ is not one that is often associated with smaller businesses. Covering a broad range of functions, from funding applications to due diligence, it is generally seen as being the domain of larger firms with financial resources available to devote to their corporate strategy.
Contrary to this belief, many SMEs can actually benefit from the services of a corporate advisory firm. While smaller businesses differ wildly in their needs, depending on size and sector, as a class they have a huge amount of untapped potential. They shouldn’t ignore other possibilities to secure future growth.
“Medium-sized businesses are often the large corporates of tomorrow,” says Keely Woodley, partner at Grant Thornton. “We recently commissioned our Growth Report 2018, which found that UK companies could be leaving £72.5bn of untapped growth on the table.”
Grant Thornton believes that medium-sized businesses are the sector where the most growth potential lies. Compared to Germany, where the Mittelstand has long acted as the country’s economic backbone, UK SMEs still have long way to go.
There are a few reasons why the UK is lagging behind. According to Grant Thornton’s research, smaller businesses typically have lower business confidence due to political and economic uncertainty, which leads to shorter-term decision-making.
On top of that, investing in the right technologies can often prove difficult, and many businesses lack branding and marketing nous. More than a third of organisations surveyed ranked ‘brand, marketing and sales’ as one of their top three barriers to growth.
“If you look at where CEOs in the UK come from, very few of them have a sales, marketing and branding background,” says Woodley. “In the US, the picture is very different. This is a sign more marketing professionals need a seat at the board table.”
Through working with a corporate advisory firm such as Grant Thornton, businesses can receive help and advice throughout their lifecycle. This ranges from ensuring their corporate structure is fit for purpose, to full transactional support when they are considering mergers and acquisitions to unlock their full growth potential.
“In terms of what drives high-growth businesses, 70% believe M&A is vital to growth, 60% will take on external investment, 63% are tech confident, and 60% aren’t afraid to look outside their own sector for growth,” says Woodley.
The landscape for small businesses
Looking more closely at the numbers, there were 5.7 million SMEs in the UK private sector in 2017 comprising over 99% of total businesses. These firms – which range from sole traders to medium-sized enterprises with less than 250 employees – employed around 16.1 million people altogether, or around 60% of the total private sector workforce.
Evidently, a sole trader looking to scale up their earnings is not in the same position as a 200-person firm seeking a management buyout. However, SMEs of every stripe may lack a full awareness of their options.
While many do use the services of an accountant, this is often confined to topics like accounts preparation and tax services, and rarely extends to growth advice. According to Woodley, they risk losing out on opportunities: “Our research shows that high-growth businesses are 43% more likely to seek professional external advice, and this seems to be paying off in terms of results.”
Louis Lines, a business planning and strategy specialist at Accounts & Legal, agrees that smaller businesses often face an information gap as well as a resource gap, particularly when it comes to selling or acquiring a business.
“We’re happy to give a heads up on what pitfalls are out there, whether it’s looking at your cash cycle or how you structure a deal,” he says. “Those are the things most people don’t think about in the SME category, when they don’t have a lawyer or an advisor or an accountant looking over their shoulder on a day-to-day basis.”
As both advisors see it, the basic principles of corporate finance are exactly the same whether you’re an SME or big multinational. However, the transactions are likely to be approached in a slightly different way.
“If anything the SME community require more personal and time-intensive support as often their transaction experience has been more limited,” says Woodley. “It goes without saying that every transaction, while being similar from a mechanistic perspective, is very different depending on the culture of the organisations and people involved.”
Lines agrees with Woodley: “With an SME, the person selling the business might have an idea in mind of what they want from the transaction – maybe they want to retire or something like that. So it’s more of a negotiation in terms of what people want to achieve.”
These kinds of corporate advisory services seem particularly salient in 2018, with markers of entrepreneurial activity now at a record high. According to the Barclays Entrepreneurs Index, 2017 saw 505 M&A deals among UK businesses under five years old, up from 395 in 2016. There were also more start-ups than ever before, and more businesses that exited.
While these figures look encouraging, the picture as a whole is quite mixed. The research suggests that opportunities to scale up organisations are not being taken. On top of that, the number of UK high-growth companies has slumped to its lowest level since 2011.
It would be fair to say, then, that many burgeoning companies are not performing optimally – they are failing to achieve growth or secure investment. There is a clear need for corporate advisors that can help them navigate the complex market landscape before them.
Finding the right advisor
There are some things to consider for SMEs when they decide to take the plunge and appoint a corporate advisor.
For instance, Woodley believes it’s important to find a firm with a strong track record in delivering results, backed up with a sector specialism. On top of that, businesses should seek a team that can support your business around tax and corporate structuring in a holistic, joined up way.
“It is vitally important to understand the factors affecting our clients’ businesses, and requirements certainly differ by sector,” she says. “When we are contemplating M&A activity with them, we need to understand the corporate market landscape that they operate in, and we need to know who is buying and selling in each sector.”
She adds that, on a personal level, it’s important to find an advisor you gel with – if you can maintain a positive and friendly working relationship, that should buoy you through some of the more challenging projects.
“Ultimately it is important to find a partner who you like and trust, has some experience of your sector and business dynamics, and for whom the relationship will be important. Taking references to get an understanding of how the advisor works and verifying their relationships is very important,” she says.
Challenges and opportunities
Inevitably, businesses will have to tackle challenges, one of which is cost. SMEs often struggle with cash flow, and may feel like corporate advice is beyond them. If that is an issue, firms like Accounts & Legal, which specialise in small businesses, are often a better option than larger accountancy practices, offering lower charges that are proportional to the value of the underlying benefit or risk.
Another issue for small business owners is that they have become accustomed to doing everything themselves and may feel uneasy about receiving external input.
“The aspects that SME owners may find more challenging are the level of constructive challenge they might experience through the working relationship, but this is part of building a trusted advisory partnership built on an honest exchange of views,” says Woodley.
While corporate advisory services won’t be right for every SME, the relationship can often prove extremely fruitful, helping the company take advantage of the opportunities on offer and helping them realise their growth potential.
“Our underlying purpose is to build a vibrant economy, based on trust and integrity in markets, dynamic businesses, and communities where businesses and people thrive,” concludes Woodley.