At the head of a small telecom company that is a long way from being a household name, Alistair Mills might just be at the vanguard of a “forgotten army” of mid-sized businesses (MSBs) that hold the key to restructuring the UK’s moribund economy and reversing the rising tide of unemployment, if a new report from the Confederation of British Industries (CBI) is to be believed.
Mills started his career while still at university, buying stolen bikes from police auctions and selling them to his fellow students. After graduating, he tried the corporate route, working for KPMG in public sector audit.
“I had the worst job in the world,” he told the Huffington Post UK. “It is as bad as it sounds. I got through the first set of exams, but then I went down to the local car auction, which was a few miles away from the KPMG offices, and started buying used cars. I stood down there with all the guys with their sheepskin coats on, and I absolutely loved it. “
After leaving KPMG, he launched a ski company, which flopped.
“That was a complete disaster,” he said. “I lost £10,000, which at that stage was a huge amount for me. I was earning £12,000 at KPMG, I’d just got married, my wife wasn’t working, I bought a stolen car, the police took it off me, I didn’t get any money for it, and we were in a pretty crappy place.”
However, Mills’ ability to buy low and trade up served him well in his later career. In 2007, at the age of 32 he took over the AIM-listed telecoms business Spiritel. The company’s share price had slumped from 38p on launch to less than a penny by the time he was appointed.
Backed by a £10 million investment from private equity house Penta Capital, Mills turned the business around with a new buy-and-build strategy, making 12 acquisitions in three years and eventually selling up for £37 million to Daisy, a rival, in 2010.
Now, backed by £60 million in funding from the same private equity company and £20 million in debt from Clydesdale Bank, Mills has launched another buy-and-build technology company, Six Degrees, which hopes to mesh together different parts of the telecommunications chain for business clients.
According to the CBI, medium-sized businesses like Mills’, with a turnover of between £10 million and £100 million per year, generate a sixth of all of the jobs in the UK and a fifth of economic revenue, despite only representing 1 per cent of the business landscape.
The problem, the CBI noted in a report, “Future Champions”, released on Monday, is that the majority of enterprises in this segment are not meeting their potential, due to a combination of cultural, political and financial factors. Two-thirds of medium-sized businesses in the country grew their businesses by less than one per cent over three years, according to the study.
Overcoming some of those barriers and achieving even a relatively modest improvement to the segment’s fortunes could create between £20 and 50 billion for the economy over the next decade, the report said.
“This isn’t a silver bullet,” CBI director general John Cridland said. “it’s not going to turn round the UK growth rate in the first or second quarter of 2012.” However, as part of a “new growth path” for the UK, the sector needs to be championed, according to Cridland.
“Because government has focused very much on the S in SMEs, rather than on the M… they haven’t really given the lead to other stakeholders to focus on the needs of Ms. Where M’s have made it, they’ve made it on their own, and it’s sometimes been a lonely journey.”
The country needs a cultural shift that sees mid-sized businesses encouraged to have more ambition, Cridland said. Those businesses need to be nurtured to improve their management skills and practices.
“What needs to be done is a very significant emphasis on management skills and management capability in these businesses to help them raise their level of ambition and their level of growth,” Cridland said.
UK companies currently perform below the levels of their international peers. In Germany, the “Mittelstand” of MSBs generates around twice the revenue of the equivalent in the UK and are a larger contributor to exports, Kevin Sneader, managing partner at McKinsey & Company, which contributed to the report.
“Management capability is a big part of the challenge, we think you could add about 1.8 per cent of overall productivity levels… if MSBs in this country performed in line with international comparisons.”
Matthew Riley, chief executive of Daisy, the company which eventually bought Spiritel, started the business 10 years ago in a garage.
“Employee number two was my wife,” he said.
The company now has turnover forecasts of £350 million and 1,500 employees, half of which are in Riley’s hometown of Nelson, near Burnley in Lancashire. Mrs Riley is no longer with the business, but is still with her husband, he added.
“It’s about confidence. It’s about having the confidence to take the next step,” he said at the report’s launch. “It’s so easy to get into a comfort zone when you’ve got a really nice business, a really nice lifestyle, it’s that next risk.”
The challenges of managing a growing business are many, particularly for owner-entrepreneurs who come to the middle size almost by accident, and are faced with professionalising themselves at the cost of their personal involvement in the day-to-day running of the companies they start.
“To go to 200 plus employees and not know people’s names, that was a real drag for me. It took me six months to get over the fact that I didn’t know everybody who worked within my business,” Riley said.
Government has not been involved at all, he added. He has never met his MP, and despite being a leading employer in an area of Lancashire that is deprived of jobs, the local council visited for the first time two years ago, Riley said.
The CBI is calling for specific initiatives that focus on the MSBs. As well as looking at programmes that address the skills gap, the organisation says that there is a need for financial mechanisms.
There are few, if any, long term financing options for medium-sized businesses. Traditional private equity and venture capital tends to need to exit within five years, meaning that after a short investment period of two-to-three years, the sales or divestiture process begins. The anecdotal shortage of traditional bank facilities is well documented. The Bank of England showed last week that lending to smaller businesses is down, but the banking sector continues to maintain that the demand has fallen, rather than just the supply.
The development of a bond market for medium sized businesses – an idea floated in a very nascent form in the wake of George Osborne’s speech at the Conservative Party conference – could help those companies that currently fall between the gaps of current financing options, the CBI suggests.
The chancellor’s statement that the Treasury is looking at “credit easing” led to speculation that some form of direct government participation in SME finance might make it into Osborne’s autumn statement. A similar initiative in the United States saw banks bundle up small business loans into bond-like financial instruments, which the government then bought.
For high-tech businesses who have proven marketable products but need continuing investments, “corporate venturing” is an option. This means hanging on the coattails of a larger business, which invests in exchange for the use of the smaller business’ services, or simply for future profit. However valuable this route might be, however, few large enterprises are willing to take on the risk of helping a smaller one.
Cridland said that without some form of tax incentive for corporate venturing, it is difficult to sell to shareholders or company boards.
Some entrepreneurs, like Mills, have found that their track record is enough to pull them through the tribulations of finding finance.
“Last time around we had 5 banks that said no,” Mills said. “This time, we had 3 banks who all said ‘please, can we lend you money?’ Last time I was in the City, scrabbling around trying to raise 50 grand here and there, this time I went to one private equity firm, said can I have £60 million and they said yes.”
Mills said that the real trick is simply to be cash generative, and to remember that banks and private equity companies do have money to invest.
“Our bank always reminds us that they just want us to be boring. They just want us to be thoroughly predictable. If you’ve got a good profit margin - it doesn’t have to be stellar - and if you’re turning that profit into cash, there is definitely money out there.”