Business development · 27 July 2016

The risky business of combined ownership and management

owner
Owner-managers often mistakenly think they need to be on top of everything, and therefore fail to plan ahead.

What are the inherent risks in both owning and running a business, and how can small business owners mitigate those risks? Our NatWest expert answers some important questions.

It is generally accepted that the mindset and skills necessary to start a business are very different from those required to grow it or run it when it’s more mature. The entrepreneur who fails to recognise this and bring in people who can balance his or her approach risks plunging their company into what serial entrepreneur William Kendall termed “the second fatal cycle of business failure” – the first being failure to get the business off the ground in the first place.

Kendall knows a thing or two about how to avoid this fate. He has founded and run successful small companies including the New Covent Garden Soup Company and Green & Black’s, and a number of years ago co-founded Nemadi Advisors, which provides funding and advice to help young businesses grow.

“It takes an individual with a powerful vision and dogged determination to get something off the ground, but alarm bells start ringing when that one person, however charismatic they might be, finds it difficult to find people who are prepared to challenge them forcefully when needed,” said Kendall.

There is no dearth of highly qualified professional managers keen to work in a more entrepreneurial environment, said Kendall. “But they want to be able to apply their skills, be listened to, and ‘have a place at the table’. The problem is, owner-managers – whatever they might say – often find it difficult to let these people in.” Not only are entrepreneurial and professional management styles like oil and water, he explained, but also entrepreneurs find it difficult to accept that others might know more than they do.

Among the common challenges that small owner-managed businesses face, says Fiona Graham, communications director at the Institute for Family Business, is the fact that the founder has a mistaken sense that they need to be on top of everything and are therefore too busy to look ahead or outwards.

Such challenges become more acute when the business starts to scale up, as Dr Shailendra Vyakarnam, director of the Bettany Centre for Entrepreneurship at Cranfield School of Management, pointed out.

“There are only a very few levers that early-stage companies have to pull – primarily getting the product or service right and winning and keeping customers,” he said. “But when they scale up, complexity grows: they need to standardise procedures and systems, manage growing numbers of people and more complicated overheads, manage a portfolio of products and new competitors and an increasing variety of internet-related things. And the only way to manage that complexity is by building the management team.”

Finance first

But where should they start? It depends on the nature of the business and the entrepreneur’s own skill set, said the experts, but the typical order of priority would be a finance director, a business development/commercial director and an operations director.

“Brilliant numbers are essential for a small, growing company,” advised Kendall. “They need to be accurate and timely and be understood by non-financial audiences, so that people can act on them. Numbers are your map: they show you where you are and where you want to go next.”

But, he warned, where you extrapolate your numbers into sales projections, you’d better believe them. Failing to do this at the New Covent Garden Soup Company nearly killed the business off, he admitted. “Spending money on good people who can help you realise your ambitions is an investment.

“We wanted to get the soup into Sainsbury’s, which was the most important retailer for us at the time,” Kendall continued. “They held out for a long time, and then one day they decided to trial it in eight stores, and it did so well that within a few weeks we were in 200 stores, and we couldn’t meet the demand. We just hadn’t planned for it.”

And planning to ensure you can fulfil demand means investing. Cash flow is the lifeblood of a small business, which has to live within its means, but getting to the next stage usually means putting your money where your mouth is, said Kendall.

“If you really think you are onto something, and you have evidence (in terms of a sales data) that it might work, there is not much point trying to do it on the cheap,” he said.

“If you want to become a £50m or £100m turnover business, don’t run around in circles for years losing good people because you think you can’t afford to pay them, because someone else will get in before you. It’s like setting off on a road trip with a tank only half full of petrol, and expecting there will be petrol stations along the route where you can keep putting a bit more in. Spending money on good people who can help you realise your ambitions is an investment.”

Learning from others’ experience

But if it all comes down to having good people, how do you get over the oil and water problem? A useful first step is to bring in a non-executive chairman who will “tell you how it is”, in Kendall’s words, and act as guide and mentor in the team-building process.

Vyakarnam performed this role at a 25-people-strong, two-and-a-half-year-old agri-tech company, that has just closed a funding round to help boost its expansion. He recently advised the company to find someone with experience of closing deals with large corporates, who could give it one or two days of their time every month.

It is these sorts of “grey hairs” that give investors confidence – whether in lending the business money or acquiring it. By contrast, they look askance at companies where, however ostensibly successful, all the power and knowledge is vested in one individual. As Stefania Zerbinati, senior lecturer in entrepreneurship at Cass Business School, said: “Apart from anything else, if that one person goes, the business goes with them.”

Vyakarnam believes that one of the biggest dangers of owner-managed businesses is their self-limiting beliefs, and that even the term “SME” is “a limiting construct”. He explained: “Mindset is crucial, and even something as simple as believing you are ‘a big company starting small’, rather than ‘a small company’ can determine your success.”

It’s a mindset that Cranfield’s business growth programme helps to foster. Having run for 27 years, the programme has proved an “inflection point” for many businesses including Cobra Beer, Go Ape and Hotel Chocolat.

In the final analysis, potential backers and acquirers are far less interested in whether a company is still run by its founders than they are in how well the business is run.

Meet Naturelly – the company encouraging healthy eating with the help of Pokémon. 

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ABOUT THE EXPERT

Marcelino Castrillo is MD of business banking at RBS in September 2015.   Prior to to that, Castrillo was MD of SME banking at Santander, where he was responsible for leading the challenge of scaling Santander’s business bank and managed the business through a period of significant change.

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