How do high-growth businesses fund growth? | align.me
2023 was defined by market nervousness. Inflation, residual supply chain issues, and interest rates that were predicted to go up combined to create hesitation and uncertainty. Whether there was going to be an explicit retraction or just a failure to expand, businesses were expecting a blow to come – yet for many businesses, it didn’t come, and growth was steady. For others, there was a dip, but momentum returned. As we headed into the end-of-year / new-year period, interest rates were being cut, and positivity was apparent across our clients. Growth is definitely on the agenda for many businesses in 2024 – which invites the question, ‘How do you fund growth beyond cash flow and private reserves?’
This question will be at the forefront of all successful business leader’s minds at some point in their growth journey, and the right moves at the right time are crucial. Our first referrer’s lunch for 2024 examined this topic from the perspective of four exceptional experts in different business funding and growth areas. But before we dive in – a short ‘safe harbour’ statement:
align.me is a sales and marketing performance business, not an investment or financial advisor. Our panellists are, but they were making general comments about their domain only during this event. They were not providing investment or financial advice to our live attendees or those who will read our articles afterwards. Seek professional advice that can be informed about your unique circumstances.
What do high-growth businesses look like?
Firstly, there’s some value in looking more closely at what defines high-growth businesses.
Gartner defines high-growth businesses as those that are growing more than 10% year on year. These businesses represented 37% of a Gartner Survey that found high-growth businesses are doing three key things:
These attributes underpinned growth. Our recent event was an opportunity to explore different mechanisms to fund growth once mindset and other crucial characteristics are in place. And who better to do that than business experts from align.me’s community with specialisation in distinct funding categories?
Introducing our speakers
We invited four panel speakers to share their expertise with our referrer’s community.
Tom Lay, Relationships Executive at the Commonwealth Bank (Commercial Banking), joined us to speak about using bank loans and debt to fuel growth. Tyson Smith, Investment Director at Quadrant Private Equity, discussed the role private equity can play in growth. Richard Wraith, Partner Innovation and Grants Services Specialist with Mathews Steer Accountants and Advisors, brought his wisdom and experience around using grants and incentives to fund business expansion. Bryn Leggett, founder and director at Hello CFO, added his considerable wisdom on the topic of trade sales to the mix.
But before we let our experts do the talking, we’d thought we’d bring funding back to that most Melbourne of pastimes – sport!
Can funding be compared with sport?
Of course, it can! And Hugh Macfarlane prompted our panellists to use a fresh lens to view each funding strategy’s dynamics and approach by asking them: “If your funding strategy was a sport, what would it be and why?”
Tom Lay: Bank funding is a team sport – a high-performing team such as Manchester United or Collingwood. You see the performance on the field but not the training and the support team behind athletes.
Richard Wraith: Competitive grants are a bit like golf – you’ve got to make the cut. And a tax incentive is a bit more like a marathon. If you qualify, you get to play and are in it for the long term.
Tyson Smith: Private equity investing is also like a team sport, but it is one you’re invested in over the long term, like test cricket. We invest alongside our partners for 3 – 5 years but sometimes longer, up to 12 years with one current client, batting in partnership deals.
Bryn Leggett: Trade sale is like a certain stage of life when growth has matured, and you’re looking for new avenues. would be the trade sale of the sporting world.
And with that in mind, let’s explore four additional levers to fund growth beyond the traditional cash flow funding.
Each of our experts shares where their mechanism for funding growth works well (the case for), their unique insights about using it, and when to perhaps not use this mechanism or traps to watch out for (the case against).
Topic 1: Using debt as a mechanism for funding growth in 2024 – Tom Lay
Our first speaker was Tom Lay, an experienced Relationships Executive at the Commonwealth Bank (Commercial Banking), specialising in navigating the complexities of debt as a funding mechanism. His insider knowledge from one of Australia’s leading banks positions him as a key resource for businesses looking to understand and leverage debt effectively. Tom led us into a discussion about navigating debt as a funding mechanism and provided us with unique insights from the perspective of CBA – align.me’s banking partner.
Tom recommends businesses approach loans with the question, “What’s the purpose of our funding, and does that match the product given by the bank?”
He then outlined the many strengths of using debt to fund growth:
Whether looking at secured or unsecured funding, planning with your bank is key. Focus on keeping detailed forecasts and analysis and staying on top of the administrative aspects of your business that support loan applications. Personally, Tom shared that he finds it valuable to catch up with clients quarterly and see what their needs are so preparation can be in place as soon as they decide to pull the trigger.
Tom also suggests that as soon as new information comes up in the business, share that with your bank and be more collaborative wherever possible. This cooperative approach to banking can reduce loan turnaround time. You can also involve your banker in strategy sessions to look at funding gaps, etc.
Banks can help businesses to:
The case against using debt to fund growth/traps or pitfalls
Tom shared a few notable pitfalls for businesses to be aware of when looking to use debt:
A bank loan probably isn’t required for a business with organic YoY growth that they can manage with monthly free cash flow. However, building an open relationship with your banking partner will help you prepare to make these decisions as quickly and easily as possible.
After Tom’s commercial banking wisdom, we passed the floor to Tyson Smith to learn about private equity and growth.
Topic 2: Private equity partnerships and funding – Tyson Smith
Tyson Smith, an Investment Director at Quadrant Private Equity, brought his rich finance history (nine years at CPE Capital, three at Morgan Stanley, and two at Macquarie Capital before joining Quadrant) to the conversation. Tyson’s deep commitment to shaping investment strategies that foster long-term growth makes him a fascinating voice on the potential of private equity partnerships. align.me has customers who are successfully funded by QPE.
Tyson started by explaining what private equity is. Private equity (PE) firms are stewards of capital on behalf of institutions like Superannuation funds. PE firms look for growing, stable, well-managed businesses that they can partner with. They often aim to sell these businesses via trade sales to realise the return on investment. The Quadrant team personally invests in their portfolio companies and transforms businesses over a short period (generally three to five years), which drives a level of strategic focus. The team at Quadrant often sit on the board and advises regarding growth to assist their partners.
As an example of the power of PE, Tyson shared a case study in which Quadrant invested to fuel the growth of an established business and trebled the return for the business, with the majority of return coming from an uplift in earnings (as opposed to a pure valuation lift). It’s clear that PE is an effective tool when significant capital is needed to fund the growth of an already successful business.
Tyson gave us a behind-the-scenes glimpse of what to expect when partnering with Quadrant Private Equity: a strong partnership with a lot of focus on driving growth. Because QPE typically invests for a deliberate acceleration, a lack of urgency or focus means opportunities can be missed. Tyson shared that the Quadrant team likes to agree on the two to three things they need to nail together with their business partners. These focus areas should be articulated on a single piece of paper to ensure the businesses aren’t doing too many things at once and not focusing on where it matters.
For businesses ready to embrace rapid, strategic growth, PE investment can change the trajectory of their business. We’ve seen this ourselves with QPE fuelling the growth of two of our clients. PE is often a mechanism of choice for companies at an inflection point, which aligns well to the point in time when both planning and execution from align.me has proven to be most impactful.
The case against private equity/ traps or pitfalls
In Tyson’s experience, cultural alignment is key. If misalignment exists between partners or management around values or trajectories, then issues can arise. One of Tyson’s top recommendations is to undertake due diligence on the firm before you partner with them. He encouraged people to speak to prior investees, founders, etc., so they know who they’re dealing with.
A second trap to be wary of is to avoid over-leveraging. Too much leverage is risky and can wipe out equity value. Businesses need to be aligned on decisions regarding leverage and ensure the cost and impact of debt introduced can be accommodated.
Tyson’s closing advice: Go all in or don’t go in at all – businesses really need to be ready for growth to embrace private equity.
And from an insider view of the world of private equity to the world of grants and incentives, Richard Wraith took the stage next.
Topic Three: Accessing grant funding and incentives to fund growth – Richard Wraith
Richard Wraith, Partner, Innovation and Grants Services Specialist with Mathews Steer Accountants and Advisors, discussed strategies for identifying and accessing grants and incentives. Richard has many years of experience in the space and an impressive track record with roles at RSM and KPMG, specialising in R&D Tax Incentive applications and broader business needs. With a focus on clean tech, emerging technology, and IT, Richard is adept at unlocking grant funding and incentives that drive innovation and growth – including for align.me.
Richard’s presentation covered three types of funding:
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Richard advises seeing grants and incentives as an ‘and’ not an ‘or’ – as a supplement to other funding mechanisms, not an alternative. For example, businesses can extend their equity with R&D and EMDG while being funded by debt or PE. Matthews Steer does an incredible job of keeping track of all these grants for their clients. Still, it can be helpful for business owners to build a bit of a matrix of what is available and assess their suitability and eligibility before investing too much time into the process. As with QPE, align.me enjoys multiple shared clients with Matthews Steer, and we are ourselves advised by them on grants and incentives.
The case against grants and incentives/traps or pitfalls
Despite the obvious boon that an injection of cash can bring to a business, Richard shared some pitfalls for businesses to be aware of.
Entitlement programs: If you satisfy entitlement criteria, you’d be foolish not to take advantage of the funds, but there are compliance requirements, and audits can happen.? Record keeping must be in good order if your business is accessing government money.
Competitive grants can be exactly that – highly competitive. Success rates are under 10%, so businesses need to do research before investing time in applications. Always be aware that you are meeting government objectives, not your own. Do the background research to understand what the government wants to fund and obtain expert advice.
Investment and loans need to be the right fit at the right time for your business. Ensuring you have the right advisor minimises grief and maximises benefits – strategic advice is key. Get your business in good order and align with the grant intent.
A word from Richard’s wisdom and experience is to run your business as you need to run the business, not to gain the grant.
The topic around grants sparked some great questions from our live attendees that shaped the discussion on the day and informed the content of this blog. So, from grants and incentives to a behind-the-scenes look at trade sales with Bryn Leggett.
Topic Four: Accelerating business growth via trade sales – Bryn Leggett
Bryn Leggett, the visionary behind Hello CFO, has dedicated seven years to supporting ambitious founders and growth-focused teams after a seven-year stint at Grant Thornton – align.me has worked with Bryn in both guises. His firm provides strategic CFO, accounting, tax compliance, and corporate advisory services, emphasising rapid, scalable growth. Bryn’s passion for connecting strategy with financial insights makes him an invaluable asset to startups and high-growth businesses. Bryn shared his extensive insights into how businesses can accelerate growth within the engine of a larger business via trade sales.
Though trade sales aren’t normally thought of as a funding mechanism, the team at Hello CFO certainly view them as one. Their perspective comes from seeing first-hand the many benefits of being wrapped up in a bigger business – and some of the traps businesses need to avoid, but we’ll come to those shortly. First, Bryn took us through a description of how trade sales work.
In Bryn’s words, at some point, the right way to grow your business will be any of the first three mechanisms covered here, and also via a trade sale.
Take the example of a business that has grown steadily for years and reached maturity. Growth is flattening, and the company might have soaked up all the achievable customers in their market – but the owners want to access a new market tier that’s available only to a larger entity. Being a part of a bigger business at this point allows the company to:
The benefits are clear, and Bryn also spoke to the importance of building social capital with the acquirer to open communication channels before and after the deal. However, Bryn had some fascinating counter-considerations for business owners.
The case against growing via a trade sale/traps or pitfalls
If a business has great organic growth, is on an achievable path to get YOY growth, and if motivation is high to continue in an active role, then tapping out early means you might be losing sale value that you could add to your business after another few years behind the helm.
There are also operating and cultural considerations that are easy to overlook. For example, suppose you’re a highly entrepreneurial person – in that case, you enjoy answering only to yourself and being able to move quickly. A trade sale could cramp your style and growth if it has historically come from taking a highly experimental approach to business. Incorporating in a larger business can mean conforming to another culture and operating within structures that are more bureaucratic than you’re used to – for the unprepared business, this can be quite jarring. There are other ways to tap liquidity that won’t enact such a large change in your business.
There can also be risks relating to the deal structure. Whether looking at shares, cash, or earn-out, with limited control over the business management post-deal, you face an element of risk that needs to be understood upfront. For example, how would a share arrangement fare if a larger entity bought the business?
Bryn’s final insights: If you want to control your business, or the deal’s structure isn’t great, a trade sale might not be the right option for you. Experienced advisors who have been through enough deals to know all the traps and benefits and (aren’t emotionally invested in the deal) are invaluable. And – beware of ‘deal fatigue’, where things have been dragging on for so long that closing the deal might outweigh due diligence and a cautionary approach. Have a knowledgeable guide in your corner at all stages.
With Bryn’s fascinating insights, we ended our presenter component of the event and headed into our Q&A.
Questions from our referrers
During the live event, our guests asked each of our experts a number of questions, and as promised, we have them here in full so you can glean some further funding insights.
1. Private Equity – How do we manage the balance between leveraging assets and the obligations of a private equity arrangement?
Tyson Smith – This comes back to alignment with the firm. Each business is different. Be conservative about your leverage as you enter a deal, and you can grow as you prove you can handle it and maintain stability over time. The first equity cheque we write is normally not the last – we often have follow-up equity available.
2. Debt – Private reserves have largely funded high-growth companies. If you had a company looking for five million in funding, how would you help them gain funding without re-leveraging themselves? How do you unlock equity from the existing balance sheet?
Tom Lay – We look at how leveraged the business’s balance sheet is and whether injecting capital would affect the business. We also look at how the cash flow is being managed. Could the business manage cash flow differently to reduce the amount you want to borrow? This approach could save you interest in the long term. We always look at what’s most optimal for the client.
3. Grants and incentives – How can a business determine where to focus without getting formal advice?
Richard Wraith – Do a decision tree mapping process answering questions like ‘Do you innovate?’ and ‘What’s your turnover?’.? There are government search engines for grants, but getting advice about competitive grants is invaluable.
4. Trade sales – What can a business do to avoid risks if they have tapped out and see alignment with a bigger business but still see risks? How can they avoid pitfalls?
Bryn Leggett – There is a degree of risk, which is one of the biggest elements of a deal you can’t fully solve. Getting to the core values, having cultural knowledge (not just at the exec level), and getting teams to meet with each other outside of due diligence is helpful. You can have great advisors in your corner who can be unemotional observers and pick up on things you might not – this comes with experience.
Post-acquisition, communication is key. Have grounded expectations. Build good relationships and gain social capital with the acquirer’s management so you can navigate back if things come unstuck. Do your due diligence.
5. Private Equity – Businesses usually want funding to fuel growth and PE firms only want to fund those already growing. How should we manage this chicken and egg problem?
Tyson Smith – This is why we have different funding categories. We often partner with businesses to help them improve systems to get ready to be sold, and we can support this transitional phase if we can agree on a growth plan upfront to hit that return we’re interested in.
We also invest in large capital programs, e.g. making largescale investments in manufacturing facilities to take a company to the next level.
6. Debt – How do you help businesses find the right answer if you don’t have the right product option for them?
Tom Ley – These conversations are always best to have face-to-face. They might need to look at private equity or something else, but they can maintain a relationship with their bank.
7. Grants – How much homework do people need to do before they get advice or look at specific grants, especially concerning competitive grants? What can businesses do to be more ready for a grant?
Richard Wraith – A company should not configure their strategy around accessing government money. Rather, use grants to support the strategy. We’re happy to have a conversation at the idea stage, looking at potential grants and then at whether you have a project that fits timelines, priorities, and budgets.
You can also have a direct conversation with the grant-giving body to really understand what they’re looking for – only then invest the time and make a detailed application.
8. Trade Sale – If you’ve found a match, how do you then configure yourself to manage the earn-out appropriately, so you don’t get tripped up by an earn-out mechanism?
Bryn Leggett – From a buyer’s standpoint, an earn-out is attractive because it aligns with what they expect from their projections – this can go awry in two ways:
Firstly, general business conditions can mean an earn-out isn’t met. If you do what you normally do (costs down and margins up) to hit your earn-out target in the short term, it might conflict with what you might do for the business in the long term. For example, you might push out payments, etc. On the other side, there might be things that you can’t control, such as the acquirer wanting to pursue a different approach and add more personnel for example. This would increase costs and delay an earn-out.
P&L can change post-acquisition, and this is commonly seen. Things change in the new context of how the business is run, so you need to be explicitly clear before you do the deal and outline what might impact earn-out targets in the post-acquisition period. This is where the value of experienced advisors and water-tight documents pre-deal is critical.
An exceptional summary for those who skip to the end
There was a lot to take in during this event however, Hugh offered the following summary after our exceptional presenters were finished and attendee questions were answered:
Until next time
We’re deeply thankful to our distinguished speakers and community of referrers for making our inaugural 2024 event an enlightening and broadening experience. The chance to share and gain knowledge collectively is unparalleled, and we’re committed to maintaining a space where our community can forge connections and thrive together.