Michael Pay of EMC Corporate Finance discusses the commonly-raised issue of how a business owner prepares their business for growth

“How to cope with growth” may sound like a high class problem but it turns out to be a very similar question to “how to avoid stagnation”. As advisers to business owners, it is often a question that we are asked, possibly more so in recent times with management fighting inflationary pressures, changing supply chains in light of global events and increasing costs of capital from interests rates to tax and even legislation. In the world of dealmaking, buyers often want to understand how a target addresses these challenges, they are looking beyond the deal to what it means for them. So how do you cope with growth?

Goals

Perhaps the primary factor in avoiding stagnation, or planning for the future, is goal setting: invest your ambition and appetite for growth in defining a destination, and growth is much more likely to be sustained. It is important to state (write down) your objectives clearly with intermediate, time-bound objectives which are “stretch targets” but also achievable.

As Lewis Carroll’s Alice discovered, “it is difficult to plan your journey if you do not know the destination”.

The challenges

As business grows, the immediate challenge is simply handling the workload, often followed swiftly by funding the growth – preferably ahead of cash requirements. A stressful time, albeit with immediate rewards, this period typically involves long hours, investment in plant and equipment, relocation of premises and/or recruitment and training of staff. From this tumult of activity and decision making will emerge the shape of a new organisation.

Each decision will be relevant to the situation at the time it was made, particularly where management finds itself reacting to circumstances rather than planning for the longer term. Adjustments are therefore needed periodically along the way and, as growth continues, the changes needed may be significant. Initiating these may require greater courage – or the clarity which comes from knowing and believing in the goals.

The organisation

In the case of a start-up, the organisation will transition from a founding team, within which many of the tasks are shared on a flexible basis, to an expanding organisation in which it becomes increasingly difficult to keep abreast of all the activities taking place. The scope for duplication, conflict and confusion grows ever larger.

It now becomes important to define roles and responsibilities, not only for the new recruits but for everyone involved in the business. Some roles may be difficult to define; some functions or projects within the business may still need to be shared. At times, it may be necessary to redesign roles quite regularly – it is still vital for everyone to know explicitly what they are responsible for at any given moment.

When recruiting, and where the budget allows, this should be taken as an opportunity to bring in knowledge or skills which the incumbent team does not possess. For some start-ups, this effectively constitutes a transition to professional management. Ideally, as many successful entrepreneurs advise, surround yourself with people better than you. This could be a combination of full time, part time and contracting personnel, depending on the circumstances.

As the business grows further, and the organisation matures, there may be further indications that new structure, systems or disciplines are needed, such as:

• Performance gaps are recognised but appropriate countermeasures seem impossible to resource effectively
• Significant difficulties arise when key personnel are absent
• A large proportion of time is spent putting out fires, especially by management; a “hero” culture is taking root
• There is a high level of stress, low morale and/or high staff turnover
• The top line is growing but the bottom line is not
• There are too many meetings, with more tactical detail than strategic content; management energy is fully absorbed in managing the status quo
• A lot of finger pointing and little resolution

The changes needed to tackle these problems are various, but often involve:

• Review the balance of attention and resourcing dedicated to training, root cause analysis and improvement activities
• Introduce a programme of best practice methodology, such as lean thinking
• Formalise and standardise processes
• Review adequacy of systems.
• Review management structure, and alignment of metrics and incentives to business goals
• Review (Pareto analysis of) contribution to bottom line of customers and value streams
• Review top management style!

Does structure kill entrepreneurial spirit?

The founding members of a start-up will know, understand and believe in the business mission and will share any important information there may be. In a growing organisation, however, this will no longer be the case, nor might everyone share in the entrepreneurial spirit that brought the business into being. Communication and knowledge become more function-specific and tasks become part of the day-to-day workload: defined processes, within departmental structures, are dutifully fulfilled by dedicated staff.

This doesn’t sound very exciting. Is structure and standardisation, then, the death knell of flair within the business? Should a business keep roles and practices informal and loose (and invent a new way of doing things every time)?

Time for some analogies: how do the All Blacks produce displays of such flair on the rugby field so consistently? Or how do world class orchestras produce such virtuosic performances time after time? Do they achieve this by doing everything differently every time? Of course not. It is only by mastering the basics so perfectly that they are freed to display their flair and push the boundaries of performance.

So too in business. To define and standardise, (continually improve and occasionally transform) the core processes of the business, not only enables excellence in performing today’s activities but, in the absence of fires to fight and tactical decisions to micro-manage, frees top management to focus on innovating and growing the business. By considering these not only will your business be in better shape it will also be more valuable, be it for an investor or acquirer.

Michael Pay is co-founder of EMC Corporate Finance

www.emcltd.co.uk