What does the post-pandemic world hold for your SME?
As the worst of COVID-19 looks to be behind us, now’s the time to take advantage of the opportunities offered by the economic recovery
After one of the most difficult periods for SMEs in living memory, there are now signs that an economic recovery is taking hold.
Of course, there are still big challenges – from global supply-chain issues to the threat of rising inflation – but from the depths of the most severe recession in 300 years, it’s clear that conditions for running a business are improving. In August, the UK economy grew by 0.4% and it’s now just 0.8% below the pre-pandemic level, according to the Office for National Statistics.1
But what does a rising economic tide mean for your business? Is now the time to invest for growth or seek a buyer? Should you continue operating in the way you did to get through COVID-19, or is now the moment to expand your horizons with new products and services?
For many small businesses, the pandemic proved to be impossible to survive. Thousands of owners decided to wind down their companies in the face of conditions no one could have anticipated at the beginning of 2020. For some, there is still more pain to come. Global insolvencies are forecast to increase by 15% next year (2022) as government COVID-19 support programmes are withdrawn, according to the Global Insolvency Index compiled by the trade credit insurance provider Euler Hermes.2
Yet many other entrepreneurs find themselves in a position of strength, just as the economy is starting to improve. Businesses that have come through the crisis are typically leaner, more efficient and focused on the areas that bring the greatest growth or profits.
“Many of the good businesses have found they’re now in a relatively strong position,” says Crawfurd Walker, our Chief Revenue Officer here at Elephants Child. “The pandemic made them focus on what actually drives value in the business and what they’re good at, which shows you what provides profit, but also what provides growth to the company. In many cases, they are now more profitable and have some cash in the bank.”
For companies in this position, there is a world of opportunity, with the potential for rapid growth or a lucrative sale. It is critical for these SMEs to look to the future and strike the right balance between investment in the business, expansion and focusing on the core elements that made them a success in the first place.
There are several options for entrepreneurs running a strong, growing business during a rising economic tide. One is to sell a minority stake to an investor. This has the advantage of providing you with some financial security while allowing you to remain in control of the business. A second option is to sell the business (see below). A third is to invest in growth, with you still fully invested in the business. With all three options, it’s essential to plan ahead.
“It’s vital to get a proper plan in place and get focused, then concentrate on delivering on that plan over a three to five-year period because that is what will drive your value,” adds Walker.
For some business owners, now might be the time to consider selling – and there are certainly plenty of potential buyers for the right business. Spending by private-equity investors on UK companies has reached its highest level in five years, highlighting the appetite for well-run businesses that can point to a bright future.3
However, failing to plan ahead can reduce your chance of a successful exit. If your business is too reliant on you as an individual, it potentially becomes less attractive for a buyer, even if that is some years in the future. All start-ups rely on a founder, or group of founders, but as they grow, successful entrepreneurs put structures in place to allow the business to function without them being involved in every decision.
Walker says: “If you don’t evolve and put the right structures in place, it could become a successful lifestyle business, which is not something that can grow and give you options for an exit. It makes it much harder to sell. There’s more risk – both for the business owner and any potential purchaser – and it’s difficult to walk away or get as much cash upfront in any potential sale if it’s all on you.”
In all situations, it pays to take advice from professionals such as those at St. James’s Place. Ultimately, a good business will always have the best chance of increasing profitability or finding an investment.
“Most entrepreneurs will set up a business because they’re very good at the day-to-day of that business,” says Walker. “They get very successful and then have a company on their hands but hit barriers they can’t get over. They’ve never actually structured a company for growth or for a potential exit. That’s when it’s time to seek advice. A good company in the right shape, with the right structures in place, will attract interest and investment.”
Sources:
1 The economy grew by 0.4% in August 2021, as services output grew by 0.3%, Office for National Statistics, October 2021
2 Insolvencies: we’ll be back, Euler Hermes, October 2021
3 UK private equity activity soars to highest level in five years, despite impact of COVID-19 on the economy, says KPMG, KPMG, August 2021
This article is written for the St James’ Place Entrepreneurs Club newsletter. The opinions expressed by third parties are their own are not necessarily shared by St. James’s Place Wealth Management.