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How taking control of your business’s ideal ending can help you make the best growth decisions now.
There’s something irresistible about a startup story. Highs and lows, founders driven by passion, determination and drive, until success! The market embraces it — the business is profitable.
The end of the story is less sexy — and for founders, much harder to think about. In fact, with research suggesting that only 19% of Australian SMEs have an exit strategy, retirement or succession plan, we can assume that four out of five SMEs do not.
Without defining how they want to end their business story, founders can find themselves flailing in the middle of it. Are they hoping to sell their business, or be part of it until retirement? Are they searching for a strategic buyer, or hoping family members will take over?
The decisions founders make now will affect the outcome of their business long term.
Taking a growth capital partner
There are many scenarios for exiting a business, and only founders can determine what’s right for them. Once they land on their ideal outcome, capital partners can help them take the right steps to get there.
Businesses can access many types of capital, both debt and equity — and their ideal ending will help inform the kind of capital that is suitable, and what it’s used for.
Growth capital is one type of capital. It helps businesses invest in growth opportunities and is characterised by its patience and flexibility. Funds also offer connections, support and strategic advice.
In several scenarios, growth capital can help a business scale and grow towards its ideal outcome.
1: Long term business ownership
For some founders, their business is a lifelong commitment. They aim to build a stable, sustainable model that will support them long term until retirement.
Patient capital is helpful, as it gives businesses time to grow sustainably before the investor exits. Often, growth capital will fund organic growth: increasing capacity, expanding market reach, creating new products or looking at strategic capabilities. The capital might also support working capital requirements.
An external investor can contribute more than just capital too, helping the business bolster governance, open new doors and work to ensure the model is sustainable for the long term. This will help the business to achieve a premium price when the time is eventually right to sell.
2: Succession
Many business founders’ ultimate goal is to pass on ownership to a family member or colleague. Succession planning is critical to ensure the business’ survival, with a common risk being that critical knowledge is often tied up with the founder. However, research suggests that over half of family businesses have no succession plan in place.
Growth capital could support succession in several ways, including from a financial and a knowledge-sharing perspective. Financially, if there are multiple founders, growth capital may buy-out a departing founder’s share. For a single owner or family business, it may help the family ‘de-risk’ their capital before retirement, so their whole family fortune isn’t tied up in the business. Alternatively, when there is no one to pass the business on to, growth capital could be a stepping stone to partially sell to a third party, enabling the founder to extract part of their wealth, while continuing to build the businesses value and legacy.
Partnering with a growth capital investor also allows founders to transfer knowledge during a transition period while they benefit from an external investors’ strategic guidance. This helps bolster their team’s capabilities while the nominated successor gains the benefit of receiving the guidance they need to be successful.
3: Short term exit
Other founders aim to exit their business in the near future to realise their financial gains from their business. Their ideal ending might be a sale, merger or listing on a stock exchange.
At this stage, the business may focus on building value that will result in a higher business valuation at the time of sale. This could be achieved through various approaches such as entering a new geography or launching a new product or service. However, this all requires investment, and a business may not have the working capital to realise these opportunities. Growth capital accelerates this process as an intermediary investment, enabling businesses to claim ‘first-mover advantage’ and grow faster than they might have anticipated.
Write your own story
Only business founders can determine what their ‘happily ever after’ looks like — it’s their story to tell. And once they’re clear on what the ending should be, growth capital may create the best path to take them there.
ABGF is Australia’s only purpose-built growth capital fund dedicated to the SME sector. We have over $500 million of capital to deploy, with initial investments of $5 million to $15 million in each business. ABGF brings together capital, capability, and connections, while only taking a minority stake in the business. Our unique public private partnership model, facilitated by a powerful alliance between the Federal Government and six leading banks, bridges a critical gap in the market.
