So, if you’re an entrepreneur, there’s a lot you need to know about scaling your business; especially when it comes to getting funding.
If you’re looking to grow a successful business, chances are you will need to obtain more capital. It’s an essential part of building a thriving enterprise.
But it’s not easy, is it? For many entrepreneurs, it can be quite confusing.
Any founder of a company or small business owner knows that it’s tough going out there. Small businesses are the lifeblood of economy, but entrepreneurs have many challenges facing them. This is especially true when it comes to gaining the funding needed to scale.
I spoke with Callum Laing, partner at Unity Group, about the challenges small businesses face and a unique opportunity that they can potentially benefit from. Laing is co-author of the new book “Agglomerate – Idea to IPO in 12 Months”, and is a previously published author of "Progressive Partnerships - The Future of Business."
Laing’s mission is to make it easier for entrepreneurs and startups to get the resources they need to achieve their objectives. As an author and businessman, he has helped many business owners realize success in their funding efforts. In this interview, you will learn why an IPO or an acquisition might not be the best funding solution for your company. You will also learn alternative methods of raising the capital you need to grow your business.
What are some of the biggest challenges small and mid-sized companies face at this time?
Small and mid-sized companies, generally referred to as SMBs, usually are companies with less than 500 employees. According to the 2012 US Census Bureau data, firms with fewer than 500 employees accounted for 99.7% of those businesses.
Access to resources is always a major challenge for SMBs. Business owners struggle every day to scale. Without capital it is difficult to attract great talent. Without great talent it is nearly impossible to compete with the big companies. If they are ‘lucky’ enough to be in a position to take on investors or a bank loan to scale, the terms are normally so onerous it ceases to be attractive.
What about achieving scale through an IPO or an acquisition?
Because of the difficulty in accessing capital, business owners often believe the only way to get investment is by going public or getting bought out. However glamorous those two options may sound, the reality is much harsher and often comes at a very high price. The public hears about the shiny new “unicorn” start-ups that end up being covered in the media all the time. These include the Ubers, the Airbnbs, and the Dropboxes. But the vast majority of businesses toil away under the radar.
IPOs, acquisitions or investors all come with strings attached. In fact, those strings are often more like chains and padlocks. Business founders have to sell their soul, their dream and their control to the investor. In small business, much of the value of that business resides with the founder and her senior team. When investors come in and take control they are removing the power from the very people that got the business to where it is today.
What are the drawbacks of these options that founders often aren’t aware of?
When companies sell or merge, you often see an exodus of talent --- sometimes with key accounts. Small businesses depend heavily on the talent of key employees. A change in management philosophy and execution often creates conflict between the buyer and the bought; many M&As fail because of this.
Post-merger, you also frequently see the removal of one of the brand names, usually by the company that was bought. This destroys a lot of the brand equity carefully cultivated over the years. Most roll ups are either debt funded or investor funded. Either route creates a huge stress on the eventual vehicle.
Then there’s going public through an Initial Public Offering (IPO), which is very time consuming and costly. Public companies also need a board to run both the business and the IPO. Some IPOs are exits in disguise. The talent is either leaving or planning to leave. This can lead to building a bad reputation. In other cases, the IPO is pushing for the highest valuation because of a planned exit, or they want to raise money and thus want to minimize dilution. While there are lots of advantages of going public, IPOs are simply not a great way to raise capital for the average business owner.
Where does that leave small businesses then?
It leaves them between a rock and a hard place. This is the exact situation that our firm, Unity Group, sought to alleviate. The solution we arrived at is what we call the “Agglomeration.” It sounds like a fancy word, but it is taking the best of mergers, reverse takeovers (RTOs), roll ups and IPOs…with none of the downside.
The best way to look at it is as a cooperative IPO where a group of businesses join forces and publicly list, growing further by acquiring more companies in the same space. The twist to the model we have introduced is that the individual founders keep full control over their own entity. They are just using the publically listed vehicle as a platform. Allowing them to swap shares for more liquid shares, yet still retain the control of their own entity.
This way they achieve scale while still being able to run the business as they see fit. All member companies share a common holding company with a consolidated income statement and balance sheet. Instant scale helps them win bids when pitching for contracts, geographic coverage, and product diversification. They can talk big when they need to, and be small and nimble when it comes to serving individual clients.
What other benefits does an Agglomeration have besides scale?
There are many unique aspects of an agglomeration that helps small business owners. In terms of liquidity, the public listing allows people to sell when they want or sell a little and keep the rest. It creates financial freedom for the founders. The fact that they are all in the same boat fosters cooperation to drive share value and the timing of share exits. Since all the entrepreneurs joining are looking to grow and not exit, it is easy to get a significant multiplier effect.
When it comes to wealth and value creation, this is really the “Holy Grail” of entrepreneurship. It takes away the binary sale choice, and creates smooth and growth platform. Profits and cost savings are directly multiplied in the company’s valuation creating a direct correlation between effort and reward. We also have a dividend policy so all companies in a group issue dividends, meaning the founders get income from their shares without the need to sell them.
From an investor standpoint, an Agglomeration provides a very compelling proposition. Finally you have the ability to invest in fast growth small businesses but with the liquidity that public stock provides allowing you full access to your capital at any moment. Additionally, because there is a portfolio of companies in the group, your risk of any one company struggling is minimised by the diversified nature of the agglomeration. Companies within the group can also access soft loans from the parent, or cash and expertise to help with consolidation. This significantly increases their ability to survive and scale over their competitors outside the group.
What’s the future of Agglomeration?
Unity Group currently has around a dozen Agglomerations in process from Marketing to Childcare and from Tech to Finance, plus many others. We are always looking to speak to good, debt free, profitable businesses that would like to explore whether this is the right option for them.
Because of the massive potential in this movement, we are releasing the intellectual property on the Agglomeration in our book “Agglomerate – Idea to IPO in 12 Months.” Rather than keeping it to ourselves, we feel that letting everyone have the blueprint is the best way to allow as many small businesses to benefit as possible. In so doing, we hope to unlock the massive potential that is the small business which ultimately benefits the economy and its workers as a whole.