Businesses are borne from ideas. That idea may be a new product or service but more commonly it can be a more efficient or targeted approach to deliver an existing concept to the market.
A small business can grow rapidly through exploitation of niche micro markets and the inherent nimbleness of younger organisations. However, the rate of growth is often dependent on the risk appetite of the owner and the scalability of the idea.
A common feature of an exponentially growing business is the availability of capital. After expending your own capital, entrepreneurs often turn to the debt markets. Assuming your business can show the ability to service the debt, external financiers will support a business but will also impose a limit on lending. A financier will want to see execution and growth from agreed acquisitions before advancing further funds for successive target.
Good quality companies see a sector of the market where they can do better than existing competitors and their earnings growth will support increased funding facilities to help them build scale. However, there will come a point where a financier will no longer want to be the largest investor and hence for a business to keep expanding at the same rate they have to tap the market to raise more equity.
Equity is nearly always far more expensive than debt so before tapping that funding source, owners, CEOs and boards need to be aligned on strategy.
Greencross is a great example of an old business (veterinary clinics) reinventing the concept and leveraging the synergies to develop a consistent service and enhance knowledge and resources for existing veterinarians.
More importantly, Greencross saw that growth wasn’t just about acquiring more clinics but partnering with local community practitioners to maintain client loyalty.
When Greencross considered funding options, it partnered with everyday Australians and corporates to raise capital to continue its expansion and as we have seen that has been an amazing success story.
Growth isn’t the only reason a company may choose to become a public company. The ability to raise greater capital and also have greater liquidity in the stock makes IPO’s very attractive. This is the case for many speculative innovation companies as they try and bring new disruptive technology to the market. The perception and governance also provides business with an assumed level of respectability which may be important depending on the market they are in.
Listing is a significant decision for any board and like all important decisions, we would recommend advice be sought from your advisors and the people you respect in your organisation.
Brendan Balasekeran is a BDO business services partner in Brisbane.