The challenge of change

Adjusting to growth is one of the most difficult challenges you face as an entrepreneur. You may have the traits it takes to make your business a winner, but you'll be the victim of your own success if you don't plan for the new world in which you find yourself when your efforts start to pay off.

Growth, by its very nature, is likely to bring greater complexity to an organisation. There will probably be outside backers who need to be informed and reassured, and there will be an unavoidable new reliance on key employees who must be given real responsibility. But the key question is, how do you maintain the same company culture and winning formula that has made you successful to date, while also evolving to accommodate the new approach growth demands. Toby Stephenson of accountant PKF, who advises many young businesses, is clear about the dangers that can threaten the entrepreneur who tries to run an enlarged company in the same way they did when starting out. ‘Typically, an original entrepreneur leading a team over-stretches himself and tries to do everything,’ he warns. ‘The result is he loses control.’

Companies naturally tend to spurt forward, consolidate and then repeat the process, he adds. But if they lose control, turning them round can take as long as a year or more, if it is even possible.

‘Growth brings all sorts of challenges,’ agrees Rob Donaldson, head of private equity at fellow accountant Baker Tilly. These challenges include keeping financial structures appropriate to the size of the business and ‘letting go’ by delegating to key managers.

‘You should plan with an end point in mind,’ he adds, ‘asking yourself where you want to get to – often businesses don’t give that a second thought.’

Indeed, experts have seen time and again that the sheer excitement of doing business can lead entrepreneurs to pursue a headlong push for growth or opportunistic acquisitions without any overall strategic plan. For instance, neglecting to implement IT systems that are appropriate to a larger operation can result in the whole company’s contact base effectively ending up in one person’s head! This can obviously be detrimental to decision-making or even put that one person in a position to hold you and your company to ransom.

‘Equally,’ says Stephenson, ‘I’ve had many cases where financial systems have been neglected and businesses have grown out of control and overtraded without adequate financial back-up.’

Ultimately, making a step change from a small, intimate business (with all the vital knowledge and contacts in one or two people’s heads) into a company with more breadth and depth can make the difference between continued growth and ignominious collapse. ‘Businesses have got to grow up as well as grow,’ argues Rupert Merson, fellow of the London Business School and a partner at accountant BDO Stoy Hayward.

‘It is a myth that people who start flogging sweets in the school playground are going to make suitable chairmen of multinational companies,’ he contends. ‘The role of the entrepreneur needs to change as a company grows.’

Make a growth plan and take advice

If you want to avoid the pitfalls of growth, it makes sense to have a plan ready well in advance for how you’re going to handle that growth. This plan is very different to the one you probably drew up at the start of your business; don’t be too proud to take advice about it. Your growth plan should include strategies on delegation, handling the realisation you cannot do everything and, if possible, the inclusion of an experienced outside figure whom you respect to act as a sounding board.

Stephenson says you should:

  • Identify when you need to implement changes
  • Ensure that finance and operating systems grow with the company
  • Recognise that key employees will become more important
  • Work out how you can grow from your existing resource base

These issues can be complex, as Donaldson points out, since ‘finance is not simply a matter of conserving your cash and cutting your overdraft. It means putting your business in such a shape that you can attract finance when you need it.’

Growth almost inevitably involves bringing in outside stakeholders; you must prepare for the disciplines they will impose, which might be irksome but could do you good. An entrepreneur in sole control may be able to deal on a handshake with a long-standing customer, but a bank or outside backer will want some control of the contract. Similarly, the entrepreneur in charge may have an instinctive feel for how an operation is going, but an outside backer may want things spelt out to secure some control over developments.

Putting a plan into practice

One entrepreneur who has devised a plan to adjust to growth is Gary Keens, 41-year-old boss of Bury St Edmunds-based corporate translation specialist ASK Group. Having started the business at 24 from the upstairs bedroom of a council house with his ex-wife, Keens, with the support of Barclays Bank, is now negotiating a series of acquisitions to expand the company’s geographical reach and triple turnover to £1.5 million.

He recognises, ‘There will come a stage, next year probably, when I will no longer know what everyone in the company is doing, though at the moment I am responsible for everything. So I’m planning to give two members of staff responsibility as directors.

‘At present, I carry lots of information in my head and my intention now is to get that all down on paper.’ Keens also plans to take in an experienced accountant as consultant/finance director, so as to gain access to what could be invaluable independent experience and advice.

‘An owner can get carried away by thinking “this is a good idea” and salaried staff are unlikely to rubbish the boss’ pet scheme,’ he reckons, ‘but a consultant puts his reputation on the line and so his view, for or against, will be heard no matter what.’

Strengthen your team and systems

Adapting management to a larger scale can present ‘a massive challenge’, warns Donaldson. ‘Dealing with health and safety issues, employment law, establishing systems and human resources departments – it can all seem tame, time-consuming and a diversion from the exciting business of winning orders, spotting openings and outsmarting the competition. An entrepreneur has, after all, possibly risked everything to build a thriving business and will naturally doubt whether any employee can match their passion and determination.’

But choosing one or more people to help run a business can be crucial in building business strength for the future. Essentially, the skills needed to start and grow a business are not necessarily the same as those needed to run it from day to day.

Beware of falling into two of the most common traps lurking for entrepreneurs appointing key people: picking ciphers who say ‘yes’ to everything or picking clones of yourself. Merson quotes the founder of the Wrigley chewing gum empire as an example: ‘When two people in business agree with each other, one of them is unnecessary.’

Merson warns against the ‘what this business needs is someone like me,’ illusion shared by many entrepreneurs.

‘No it does not,’ he insists. ‘Someone like me does not want to work for someone like me!’

Bringing in key people also means incentivising them. That may not always be easy if cash within the company is tight, though there are other devices to consider, such as performance-related bonuses, pay-offs, shares or options.

‘It could be worth bringing in an accountant who is commercially experienced and can guide you through the issues,’ suggests Donaldson. ‘Or you could look for a non-executive director to give friendly advice, though you probably won’t be able to pay them very much.’

Sometimes a former boss of another company, who has stood down from full-time management, may be willing to play the role of elder statesman and adviser. And if you’re lucky, in return for ‘keeping his hand in’, such a person may not want too much money.

‘I do find delegation hard,’ admits ASK Group’s Keens. ‘Recruiting staff is my biggest risk and problem – far more than finance issues.’

Summarising the conundrum, he says, ‘We need staff who are not only good, but business-aware.’ In order to offer employees an incentive that the company can afford, Keens has given everyone in the company an element of commission or profit share as part of their pay – ‘even the receptionist’.

He claims this approach has been very successful. ‘We have no-one sitting around doing their knitting! It’s a simple but effective strategy, but I have talked to 12 competitors and we are the only company operating this way.’

Recognising that the sort of person who sets up a business will always find it hard to let go, he admits it has taken time for him to adjust his ways now he has 15 colleagues. ‘I try to lead staff towards the decisions I want to make myself,’ he confesses.

‘But you do have to learn to let staff make decisions. For example, on our new website, I still know exactly what is going on but I have asked everyone for ideas and involved them in the process.’

He says this approach has been particularly helpful in adapting systems and IT as the business grows. ‘You have to be careful not to add red tape, which is no good when you want to deliver good quality products or services quickly.’ But Keens argues ASK has got the balance right, helped by input from his staff. ‘We had no wish to introduce ten levels of documents and more red tape. So, we have evolved a satisfactory in-house process and the IT has changed. We didn’t fear the new IT, we embraced it, recognising it was going to be a key move towards a successful future.’ And he credits ‘the younger generation’ with making this transition smoother than it would otherwise have been.

Change becomes easier as you grow

Keens says the process of standing back, giving key staff the reality as well as the appearance of making important decisions, has become easier as ASK has grown. Advisers point to older entrepreneurs, who have cashed in many, but not all their chips, as figures who can play a useful role giving advice and support and acting as ambassadors for their companies – provided they have made the adjustment and don’t try to intervene all the time on everything.

It’s a great theory, but in practice doesn’t always work out. One adviser recalls, ‘We sold a business for an entrepreneur to the management team for £12 million. It turned out he didn’t really trust them and said he would have to stick around. Within three months, they told him in no uncertain terms to go away and play golf!’

As Donaldson warns, ‘Many entrepreneurs like being the fulcrum of a business, on which everything pivots. That can be great at the start, but it’s not a good long-term strategy. If that person is ill or simply too busy, it can have serious consequences on the smooth running of the operation and, ultimately, on productivity and growth.’

These are lessons company bosses cannot afford to ignore, especially if they are planning to eventually bow out to make as profitable an exit as possible. Donaldson says, ‘If there is no devolution, there will be a negative impact on the value of any float or trade sale. All entrepreneurs of small and growing firms should have an eye on the horizon and how best to get there, which is why it’s important to start planning now. Growth is a good thing, but not at the expense of your business’ future.’

See also: The five key business growth drivers

Marc Barber

Raven Connelly

Marc was editor of GrowthBusiness from 2006 to 2010. He specialised in writing about entrepreneurs, private equity and venture capital, mid-market M&A, small caps and high-growth businesses.