Scale-up finance: FDs are mission critical

The government backed fund knows what it wants to see in a scale-up. At the forefront of its wants, said Paul Oldham, the BGF's chief in the South West and member of the fund's national committee, is a robust finance function.

If the business you work in wants to take on investment, Oldham told AccountingWEB, you should start thinking about strengthening the finance department.

We spoke to Oldham about the FD and CFO's role in garnering investment, the BGF, and generally the challenges of scaling up.

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We are a UK investment house, although we’ve just opened an office in Dublin. In terms of size of business, it’s typically turnover of £5m upwards. There’s no upper limit although most businesses we talk to turnover between £5-150m. We’re looking to back ambitious businesses, which need a combination of money and wider help to deliver their growth plans.The average size of our first cheque is tends to be about £5.5m, but we do quite a lot of follow-on investment into our companies.

Given that the businesses we deal with turnover more than £5m, we’d expect to see a finance director in place for all of our investments. Then the debate tends to be around the level of experience of that person and whether they’re full or part-time. Within a very small businesses we could live with a part-time FD on the basis that they are going to become full-time.

We make quite a lot of investments where our view is that the finance function needs strengthening and quite often the business doesn’t have a proper CFO. They might have a financial controller or part-time FD or the CFO there was okay for the business when it was smaller, but the business is starting to outgrow them and they need someone more experienced and more capable in that role. That’s a conversation we’ll have with the management team. In quite a few situations we do end up agreeing a plan, which is over the next six months we’ll look to recruit a stronger CFO. It’s a really important area.

Given the size of a lot of the businesses we invest in, the CFO role can often be wider than just the finance function. It works really well if you have a very commercially minded CFO, that not only makes sure the numbers are correct, but provides strategic interpretation and adds value right across the business in things like pricing tenders and procurement.

Very often we’re backing chief executives that are doing the biggest job they’ve ever had. If they’re running a £20m turnover business that might be the biggest job they’ve ever had because they’ve grown the business to that point. They want to take it to £50m. If we can find them a really good chairman who knows their sector and who’s maybe run a business that’s £50m or 100m in their sector and, if they get their personal chemistry right, that’s a great asset to have in your business. We put a lot of effort into having a network that can deliver those sorts of skills.

In terms of assessing businesses, you could strip things down to three key areas, market, product or services, and the management team. They are the three most important headline issues and most of the other questions fall into those buckets. We look at gross margin trends. We analyse how the business makes its money. If it’s got different business streams, what’s the profitability of those different business streams? Do they know they’re profit per customer?

You want to cut the profitability in a number of ways, make sure you understand where they actually make their money. A lot of small businesses don’t actually fully understand that, they look at the aggregation of if. You sometimes find that the number that drops out of the bottom is okay, but when they look at the details they have loss-making customer or contracts. Either they should be getting rid of the customer or putting the prices up because they’re close to working for nothing.

Three things would differentiate BGF when you compare us to a typical VC or private equity house. I’m not saying other people don’t have elements of this, but when you take it together as a package it’s unique. The first thing is we have a very long-term investment approach. We don’t have any ability to force a sale of the business - in theory, we can hold the investment forever. The second one is we only ever take minority shareholdings. The third things is that we have geared up our support network, so that we can bring more than just money, we can bring support and advice.

What works well for us is to get into a business before it’s actively looking to raise finance. We’ve got 10 offices across the UK that means we can get out to meet businesses just to get to know them and we do a lot of that. BGF has invested £1.3bn in 190 growth-stage companies and 75% of our investment has been outside of the London area.

We recruit a lot of accountants. A good grounding for our business is people that have worked in corporate finance or private equity and a lot of those are people with chartered accountant qualifications. If we went through our list of investors across the UK there would be quite a lot of chartered accountants in there. I hated auditing, I got out of it as quickly as I could.