Simon  Morrish
Simon Morrish CEO
13 Jul 2021

Reproduced with permission from The Times Enterprise Network. To subscribe click here.

Reading about the private equity bidding war that’s brewing for Morrisons made me reflect on just how active private equity investors have become. They seem to spot opportunities that others cannot see, even the well-paid research teams at our City institutions that are meant to help inform the public markets.

In fact private capital is everywhere. Small and medium-sized companies increasingly turn to venture capital and private equity to help them fund their growth. It’s an attractive option. Not only do you get that injection of capital, but you can also bring on board the fund’s market expertise, contacts and experience. However, all this comes at a price and it is often quite an expensive one.

Good old-fashioned bank lending is an alternative. That’s the way we went at Ground Control when, in 2004, Kim and I financed our purchase of the business through a £5.5 million bank loan together with a £4 million loan note from the seller, while remortgaging our home and using all our personal savings (including a bit of borrowing from friends and family) on top.

While the first couple of years were tough, we’ve never looked back — and we’ve not used any private equity investment since. For us, bank lending has served our purposes well. We use it to make small acquisitions, finance the continuing growth of the business, and pay cash out to shareholders in a series of share buybacks — we have never paid any dividends. We revisit our banking facilities every three to four years when we negotiate a restructuring of the debt.

As a result, our share of the equity has grown from 30 per cent when we bought the business to more than 75 per cent now, with the remainder in the hands of all our colleagues who help to deliver excellent customer service and drive the business forward. After the initial deal, our debt has never been more than two times our annual earnings before interest payments, depreciation and amortisation (Ebitda). The money we borrow is scheduled to be paid back over a four or five-year period and we’ve found that leverage ratio of debt to earnings pretty comfortable, especially considering we have had 17 consecutive years of profit growth.

Speaking as an owner, I’d encourage others to make judicious use of debt to continue to grow your business. The pandemic has prompted many firms to borrow simply to stay alive, which is understandable and I wish them well. For those considering borrowing to fund growth I always bear the following in mind.

First, don’t be afraid of taking on debt, or increasing it when new business opportunities come along. Some people just don’t like being in debt, or dealing with banks. But if your underlying business is sound, debt is in fact a great low-cost vehicle for growth.

Second, keep your borrowings at judicious levels. Don’t take on more than you can manage. Keep leverage sensible. I know some businesses with private equity investment that owe four to six times their earnings. That just seems too risky to me and gives no leeway if you hit a bump in the road on profitability. That’s where the vehicle for growth can turn into more of a juggernaut running through your business and dominating everything that happens and every decision that’s taken.

Third, don’t be afraid to move banks if the current one is letting you down. In our early days, we had an excellent bank manager at Bank of Scotland but when the bank was acquired by Lloyds it really didn’t work so well. She tried her hardest to shield us from the corporate confusion going on, but when she moved to a new role, we ended up stuck with a banking partner that made no attempt to understand our business or be supportive.

We refinanced all our bank debt to make another acquisition and had paid significant fees in the process, but a few months later we were told that we were now “too large” for them and we needed to look elsewhere for banking. To say I felt duped by Lloyds is an understatement. We moved to a club deal with Santander and Barclays and things have been much better. We feel we are back to the supportive business-building relationship we used to enjoy.

Moving banks can be daunting — it’s a big decision, with a lot of work — but if you take decisive action and find the right bank and, most importantly, the right relationship with a manager who will support you, it’s absolutely worth the effort.

You have to go in with your eyes open. Banks are very good at offering you an umbrella when it’s sunny and then asking for it back when it rains. Overall though, with the right partner, it’s worked well for us. The steady growth of Ground Control is testament to that — from turnover of £8 million in 2004 to being on track for £150 million this year.

I know that bringing private equity investment on board has a glamour about it, plus the potential “magic sauce” of the fund’s connections, focus and drive. For many businesses, such investment can give them the supercharge they need. But it also means giving up a significant stake in your business, which I would much prefer to share with my team running the business as the private equity economics are usually firmly weighted in the investor’s favour.

So while it may be less sexy, don’t overlook bank debt. Used well, it can be a highly effective way to fund growth.

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