I have been reflecting on a recent dinner meeting with two directors of a successful company. Their business has been growing in turnover and profit over a number of years and this trend is expected to continue as further products and new markets are developed. The company is owned by several shareholders, all of whom are actively involved in running the business.
As we sat down to dinner, the clients raised various areas for discussion, initially very much focussed around day-to-day practicalities, but as the evening progressed, the nature of the conversation changed and we began to talk more openly about the potential for the business. Without doubt, the company will continue to grow as it is, but it is clear there are other avenues which could enable it to truly optimise its potential.
It is fair to say that the remainder of the discussion raised more questions than it answered, but some key discussion points were:-
Should the business seek external investment?
External investment would certainly allow both product and market development to be accelerated, increasing both turnover and profitability. Alternatively, it could provide funding to purchase another business, but by which route? Conventional bank borrowing may be an option, or the business could look for a suitable third party investor who can bring capital and expertise. This will, of course, dilute the shareholding of the existing directors, but the value of the business will potentially be greater.
What are the aspirations for the business?
Is the plan to continue to grow the value of the business and ultimately capitalise this through sale, thus creating personal wealth, or is the business to be maintained long term, meaning personal wealth needs to be generated through income?
What are the individual needs of the shareholders and do they differ?
The shareholders had started the company with the common objective of building a successful business and this has been the focus to date, with the feeling that shareholder’s interests are aligned. As our discussions progressed, further questions highlighted that this might not actually be the case.
The shareholders range in age from mid 30s to early 50s. Retirement for some is a long way off, but much closer for others. So how does a shareholder exit the business? An older shareholder may wish to capitalise value in the medium term to secure future retirement, whereas a younger shareholder may want to continue to generate income, or capitalise the value to allow them to consider other projects.
Whilst many questions had quite literally been brought to the table, the directors left with the strong belief that they need to set quality time aside to fully consider their strategy and options. Although already a successful business, there is clearly the opportunity to develop it further to truly optimise its potential. There is also acknowledgement that this needs to start with open and honest discussion around each individual shareholder’s personal objectives, as these need to dovetail with those of the business for any long term strategy to be successful.
Having reflected on the evening, it is clear that allowing time for conversation away from the business permitted the directors’ thoughts to move from specific business related issues, to considering their individual objectives and the longer term business potential.
I am not suggesting that all business owners should rush to the nearest restaurant and evaluate their growth plans, but do wonder, with the day-to-day pressures of running a business, how many owners can honestly say they have “invested” in allowing themselves quality time to consider ways to truly optimise their potential and to achieve both their business and individual goals?
Andrew Kilby is Managing Director of Armstrong Watson Financial Planning Limited